UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
Report on Form 6-K dated December 12, 2005
Commission File Number 0-10906
The BOC Group plc
(Translation
of registrant’s name into English)
Chertsey Road, Windlesham
Surrey, GU20 6HJ England
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F: Form 40-F:
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).
Yes: No:
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).
Yes: No:
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes: No:
Enclosure: The BOC Group plc Report and Accounts 2005.
This report contains the Report and Accounts 2005 of The BOC Group plc (the “Company”) for the financial year ended 30 September 2005. The Report and Accounts 2005 comprises the annual report and accounts of the Company in accordance with United Kingdom requirements and the information required to be set out in the Company’s annual report on Form 20-F for the financial year ended 30 September 2005 (the “Form 20-F”) to the Securities and Exchange Commission. The information in the Report and Accounts 2005 that is referenced in the “Cross reference to Form 20-F” table on page 146 shall be deemed to be filed with the Securities and Exchange Commission for all purposes, including incorporation by reference into the Company’s annual report on Form 20-F filed with the Securities and Exchange Commission on 12 December 2005.
BOC Report and accounts 2005 |
||
The BOC Group plc Annual report and accounts 2005 |
The Groups objectives
Over a sustained period, consistently to outperform our peers in terms of safety, customer service, revenue growth, earnings and cash generation.
We will be the employer of choice for all existing and future employees.
Who we are
BOC
employs over 30,000 people and earns a living in some 50 countries. Over
80 per cent of our revenue comes from industrial gases and we serve customers
in fields as diverse as electronics, chemicals and medical. We are organised
into three lines of business and a specialist logistics business, Gist.
01 | |
The BOC Group plc is a public limited company listed on the London and New York Stock Exchanges and registered in England. This is the report and accounts for the year ended 30 September
2005.
It complies with UK regulations and incorporates the annual report on Form 20-F for the Securities and Exchange Commission to meet US regulations. An annual review and summary financial
statements for the year ended 30 September 2005 has been issued to all shareholders who have not elected to receive this report and accounts.
Cautionary Statement
Forward-looking
information, within the meaning of section 27A of the US Securities Act of 1933,
as amended, and section 21E of the US Securities Exchange Act of 1934, as amended,
is
given throughout this annual report and accounts including in the chairmans
statement, the chief executives review, the Group profile, strategy, research,
development and information technology, the operating review and the financial
review. Such forward-looking statements include, without limitation, those concerning
the companys operations, economic performance and financial condition,
namely (i) the companys strategies, (ii) the companys research and
development and information technology activities, (iii) the companys investments,
(iv) the commencement of operations of new plants and other facilities, (v) the
companys restructuring plans, (vi) efficiencies, including cost savings,
for the company resulting from business reviews and reorganisations, (vii) managements
view of the general development of, and competition in, the economies and markets
in which it does, or plans to do, business, (viii) managements view
of the competitiveness of its products and services, and (ix) the companys
liquidity, capital resources and capital expenditure. Although the company believes
that the expectations reflected in such forward-looking statements are reasonable,
no assurance can be given that such expectations will prove to have been correct.
By their nature, forward-looking statements involve risks and uncertainties because
they relate to events and depend on circumstances that will or may occur in the
future. Accordingly, actual results could differ materially from those set out
in the forward-looking statements, as a result of a variety of factors, including
changes in economic conditions, changes in the level of capital investment by
the semiconductor industry, success of business and operating initiatives and
restructuring objectives, customers strategies and stability, changes in
the regulatory environment, fluctuations in interest and exchange rates, the
outcome of litigation, government actions and natural phenomena such as floods,
earthquakes and hurricanes. Other unknown or unpredictable factors could cause
the companys
actual results to differ materially from those in the forward-looking
statements.
Financial year
Throughout the
report and accounts, reference to 2005 in the text means the financial
year ended 30 September 2005. Similarly, references to other years, eg
2006,2004 and 2003, also mean the financial
years to 30 September unless stated otherwise.
02 | The BOC Group plc Annual report and accounts 2005 |
Financial highlights
Turnover subsidiary companies | Operating profit | Profit before tax | Earnings per share | |||
2005 | 2005 | 2005 | 2005 | |||
£3,754.7m | £543.5m | £593.6m | 74.1p | |||
2004 £3,885.4m | 2004 £559.5m | 2004 £412.3m | 2004 53.5p | |||
2003 £3,718.3m | 2003 £438.6m | 2003 £351.9m | 2003 44.5p | |||
Turnover including share of | ||||||
joint ventures and associates | Adjusted operating profit | Adjusted profit before tax | Adjusted earnings per share | |||
2005 | 2005 | 2005 | 2005 | |||
£4,605.0m | £564.2m | £505.7m | 67.5p | |||
2004 £4,599.3m | 2004 £576.9m | 2004 £504.3m | 2004 63.2p | |||
2003 £4,323.2m | 2003 £505.6m | 2003 £418.9m | 2003 52.9p | |||
2005 results
Analysis by business | |||||
Turnover (including share of joint ventures and associates) | £ million | % | |||
1. Process Gas Solutions | 1,466.3 | 32 | |||
2. Industrial and Special Products | 1,721.7 | 37 | |||
3. BOC Edwards | 826.0 | 18 | |||
4. Afrox hospitals | 275.1 | 6 | |||
5. Gist | 315.9 | 7 | |||
Total | 4,605.0 | 100 | |||
Adjusted operating profit | £ million | % | |||
1. Process Gas Solutions | 207.2 | 37 | |||
2. Industrial and Special Products | 289.4 | 51 | |||
3. BOC Edwards | 38.1 | 7 | |||
4. Afrox hospitals | 37.2 | 7 | |||
5. Gist | 24.5 | 4 | |||
Corporate | (32.2 | ) | (6 | ) | |
Total | 564.2 | 100 | |||
Financial highlights | 03 | |
Dividends per share | Return on capital employed | Figures
shown as adjusted exclude exceptional items.
Other figures shown are prepared under UK
Generally Accepted Accounting Principles (GAAP)
and include all exceptional items. |
||||
2005 | 2005 | |||||
41.2p | 15.6% | |||||
2004 40.0p | 2004 14.9% | |||||
2003 39.0p | 2003 10.9% | |||||
Adjusted return | ||||||
on capital employed | ||||||
2005 | ||||||
16.2% | ||||||
2004 15.4% | ||||||
2003 12.6% | ||||||
Analysis by region | |||||
Turnover (including share of joint ventures and associates) | £ million | % | |||
1. Europe | 1,300.8 | 28 | |||
2. Americas | 1,222.1 | 27 | |||
3. Africa | 586.0 | 13 | |||
4. Asia/Pacific | 1,496.1 | 32 | |||
Total | 4,605.0 | 100 | |||
|
|||||
Adjusted operating profit | £ million | % | |||
1. Europe | 143.7 | 25 | |||
2. Americas | 100.0 | 18 | |||
3. Africa | 91.3 | 16 | |||
4. Asia/Pacific | 229.2 | 41 | |||
Total | 564.2 | 100 | |||
04 | The BOC Group plc Annual report and accounts 2005 |
Implementing our
strategy effectively
Chairmans statement
Your board has again fully reviewed and approved BOCs strategy, which is being effectively implemented by Tony Isaac and his management team. The strategy has seen BOC confirm its leading position in Asia, develop a strong base in China and invest strongly in other growth markets. It has seen a continuing commitment to safety and to improve the efficiency and environmental performance of our operations. It has seen the divestment of underperforming businesses allied to a well implemented acquisition strategy.
Rewarding our shareholders
In 2005 BOC raised its first interim dividend to 15.9p. Combined with the second interim dividend of 25.3p, this represents an increase of three per cent on the previous year as we
continue to build our dividend cover towards two-times over the medium term. Your board has decided to raise the first interim dividend to be paid on 1 February 2006 by 2.5 per cent to 16.3p.
I have updated the graphs I have shown here every year since 2001. They show BOCs total shareholder return since October 2000 compared with the FTSE100 and our major gases competitors. We have continued to outperform the FTSE100. Industrial gases companies have proved to be a rewarding investment over recent years and in the last year or so we have matched our competitors performance, although a gap remains from earlier years. In his review,Tony Isaac will explain in more detail how we have progressed this year.
Corporate Governance
This year your
company has completed its work to comply with one new set of requirements, the
Combined Code on Corporate Governance, and has made good progress on two others,
namely changing over to International Financial Reporting Standards (IFRS) and
meeting the provisions of the US Sarbanes-Oxley Act. The quarterly results to
be announced in February 2006 will be the first in accordance with IFRS. We estimate
that meeting
the requirements of Sarbanes-Oxley cost your company some £10 million this
year. We are likely to spend the same next year before the costs reduce somewhat.
BOC has to comply with these provisions because we are registered in the US,
but being a complex and diverse business working globally means that the cost
of such compliance is very high.
Next year we will, in common with all UK companies, publish an operating and financial review (OFR) as part of our annual report. The intention of the OFR is to help you, our shareholders, assess our strategies and the likelihood of their success.
External checks and reporting requirements may help but I believe the best assurance for shareholders is to ensure high standards of integrity and transparency throughout the organisation, overseen by a strong and independent group of non-executive directors. BOC has both of these. It has a strong and well-implemented Code of
Chairmans statement | 05 |
Conduct and a management team committed to the principles of accountability, collaboration, transparency and stretch, known in BOC as ACTS.
Your board regularly reviews the management of our social, environmental and ethical risks. These have now been integrated into the companys overall risk management programme. Each year our performance is judged against criteria set by the UKs Business in the Community (BiTC). To be as transparent as possible we publish on our website, boc.com, both our comprehensive submission to BiTC and its independent assessment of our performance.
An important feature of BOCs corporate responsibility programme is to enable people at all levels of the organisation to become involved and support things that matter to them. Our joint giving scheme is an example. This year countries around the Indian Ocean suffered from the appalling effects of the tsunami. Our businesses in the countries affected responded immediately with medical oxygen and with other practical help. BOC extended its joint giving scheme to match two-to-one our employees donations to the relief effort for both the tsunami and hurricane Katrina. BOC again responded when the Pakistan earthquake struck in October 2005. In total the community of BOC gave over £570,000 to the tsunami appeal and we await the final totals for hurricane Katrina and the Pakistan earthquake.
One of our US subsidiaries, along with other companies in the welding products industry, has been the subject of allegations that manganese in welding fumes causes Parkinsons disease or symptoms similar to Parkinsons. Again this year there were no adverse jury verdicts; the only adverse jury verdict was in 2003 and this is the subject of appeal in the Illinois court system.
Board of Directors
We appointed two
new executive directors this year: Kent Masters, chief executive for Industrial
and Special Products, joined the board in March, replacing John Walsh who resigned
to return to his native United States; and Alan Ferguson joined in September
as Group finance director in place of René Médori who resigned to take up a similar role at Anglo American. Rebecca McDonald was appointed as a non-executive
director in July. Rebecca is president, gas and power, for BHP Billiton. During the year two non-executive directors resigned: Iain Napier, following his appointment as deputy chairman of Imperial Tobacco, and Julie Baddeley because of increasing
demands on her time. John Walsh and René Médori each served BOC
for some 20 years, Iain Napier and Julie Baddeley for a somewhat shorter time,
and I would like to thank them all for their contributions.
Every year we review the performance of the board and each individual director. In alternate years, which included 2005, we conduct these reviews with external facilitation. They confirmed that each director contributes effectively and is committed to his or her role at BOC.
Thanks
BOCs 30,000
people around the world provide products and services that are essential to everyday
life. I thank them for their dedication and professionalism. I thank the customers
they serve for entrusting their business to BOC. I thank all those with whom
we work and in the communities where we operate for their support. And I thank
you, our shareholders, for your continuing support.
06 | The BOC Group plc Annual report and accounts 2005 | |
Chief executives review
2005 was a year of underlying strong performance punctuated by events that challenged and brought out the best in BOC and its people. We continue to see an accelerating rise in energy prices, the move of manufacturing activity from higher- to lower-cost economies and relatively slow growth in an historical context for the semiconductor industry. Faced with these long-term trends we have responded by investing for growth while concentrating on energy efficiency, cost containment and high levels of customer service.
In the year, the biggest structural change in the Group was the reduction in our ownership of Afrox hospitals. Elsewhere, among the highlights, we continued our penetration of the north American refinery market with a string of new hydrogen orders, maintained the pace of our developments in China, and saw BOC Edwards enter into an important customer relationship in Korea. In contrast, events such as the Asian tsunami, the London bombings, hurricane Katrina and most recently the Pakistan earthquake saw BOC businesses helping where they could, notably with medical gases, and BOC people giving freely of their time and money.
Against this background BOC produced good results, with turnover similar to last year at £4,605 million, adjusted operating profit down three per cent to £564.2 million, adjusted profit before tax down one per cent at £505.7 million and record adjusted earnings per share of 67.5p. Adjusted figures eliminate exceptional items. Year-on-year comparisons at constant currency show the performance of our businesses in the markets where they operate without any distortions from changes in the sterling exchange rate. Our statutory results include exceptional items and reflect currency movements and on this basis turnover was similar to last year with operating profit down by three per cent and profit before tax up by 44 per cent.
Our two gases lines of business, Process Gas Solutions and Industrial and Special Products, contribute over 80 per cent of Group operating profit and both of them made good progress. Process Gas Solutions continues to increase the percentage of its business that comes from long-term tonnage schemes, with the emphasis recently on winning hydrogen contracts and building on our strong position in Asia, and particularly in China. There has been a steady flow of new orders with some £500 million of new plant due to enter service over the next couple of years. Our Process Systems team works closely with customers to identify and deliver solutions for their industrial gases needs. This approach has seen us win a disproportionate share of the new business available. In China our success has been founded on our willingness to enter joint ventures with our key customers, enabling us to share the risks and rewards of Chinas industrial growth. Our joint venture plant building operation, Linde BOC Process Plants, gives us reliable and cost-effective plant to fulfil our customers needs. This year Process Gas Solutions grew turnover by 16 per cent and adjusted operating profit by nine per cent.
Chief executives review | 07 | |
Industrial and Special Products continues to extract value from its extensive distribution network and its high standards of product stewardship. The core industrial business continues to evolve as manufacturing processes change. We now offer a wider range of products and services to our industrial customers. We have developed sizeable businesses based on liquefied petroleum gas (LPG) and in several of our markets we are taking advantage of similar opportunities for safety products. Our medical business, which serves hospitals and delivers oxygen therapy to patients in their homes, is continuing to grow, particularly in Asia. The special products portfolio is also developing well, serving growth markets with products such as helium, packaged chemicals, refrigerants and propellants. Industrial and Special Products saw turnover decline by four per cent following the sale of the US packaged gas business last year, while adjusted operating profit rose by six per cent as profitability improved in the US.
BOC Edwards core semiconductor market remained broadly stable without returning to the activity levels seen last year. Despite this, BOC Edwards continued to improve its market position and embarked on a restructuring programme to achieve cost savings. It saw an increase in turnover of two per cent with adjusted operating profit down 21 per cent.
Gist saw some organic growth from new and existing customers and towards the end of the year it expanded into Europe with the acquisition of Van Dongen, a temperature-controlled transport business operating in a number of countries. In November 2005 it extended until 2011 its contract to manage the distribution of Marks & Spencers chilled and ambient food. This provides long-term security for a significant portion of Gists business. Gists turnover for the year rose eight per cent while adjusted operating profit fell by two per cent, impacted by higher pension and compliance costs.
In March we disposed of most of our shareholding in Afrox Healthcare Limited to a consortium led by two major black empowerment investors. Our African Oxygen Limited subsidiary retains a 20 per cent interest in the business. We received the disposal proceeds in March. Afrox Healthcare was a large employer and its disposal has reduced the number of Group employees by over 10,000. The disposal also had the effect of reducing the Groups earnings per share by approximately one penny this year and an expected further one penny in 2006.
We had another good year for cash generation, helped by the Afrox Healthcare disposal. With our strong balance sheet we are in a good position to fund our growth projects, notably the ones already won by Process Gas Solutions and those still in the pipeline.
Safety remains our number one priority. It is unacceptable that anyone is hurt in the course of our business and we continue to emphasise that safety must be 100 per cent of our behaviour, 100 per cent of the time. At the start of this report we set out our objectives as a Group. We intend to outperform our competitors and to do this we must be the employer of choice for talented people. We are working hard on all aspects of our business to achieve these objectives.
Three members of the executive management board resigned this year. René Médori became group finance director for Anglo American plc while John Walsh and Rob Lourey returned with their families to new jobs in their home countries of the United States and Australia respectively. I wish all of them success in their new careers and thank them for their contributions to BOC. Kent Masters was appointed chief executive, Industrial and Special Products, in March and James Cullens joined the executive management board in April as Group human resources director. Alan Ferguson joined us as Group finance director in September from Inchcape plc.
I thank our employees for their hard work over the past year and for their continued emphasis on high standards of customer service. I thank our customers, our shareholders, our suppliers and those with whom we work on a daily basis. BOC contributes to the economic life of many countries around the world and I thank you all for helping us to do so.
Tony Isaac
Chief executive
Strong underlying |
performance |
08 | The BOC Group plc Annual report and accounts 2005 |
Board of directors
Rob Margetts CBE (01)
59, chairman.
Appointed
chairman in January 2002. He is chairman of Legal & General Group plc, a
non-executive director of Anglo American plc and chairman of the Natural Environment
Research Council. Previously he was with ICI PLC for 31 years, becoming a main
board director in 1992 and vice chairman in 1998. He is a fellow of both the
Royal Academy of Engineering and the Institution of Chemical Engineers.
Tony Isaac (02)
64, chief
executive.
Appointed an executive director in October 1994 and became chief executive in May 2000. He was previously finance director of Arjo Wiggins Appleton plc, which he joined shortly before the
demerger from BAT Industries p.l.c. in 1990. Prior to that he had been finance director of GEC Plessey Telecommunications Ltd since its formation in 1988. He is a non-executive director of International Power plc and Schlumberger Ltd.
John Bevan (03)
48, chief executive,
Process Gas Solutions.
Appointed an executive director in December 2002. He joined BOC in 1978 in Australia and has held various positions in general management in Australia, Korea,Thailand and the UK. He was
formerly chief executive Asia, responsible for BOC's operations in 15 countries. He has a degree in commerce (marketing) from the University of New South Wales.
Andrew Bonfield (04)
43, non-executive
director.
Appointed in July 2003. He is chief financial officer of Bristol-Myers Squibb Company. He qualified as a chartered accountant in South Africa, working for Price Waterhouse, before joining
SmithKline Beecham in 1990 and rising to become chief financial officer in 1999. He joined BG Group plc in 2001 as executive director, finance, before assuming his current role at Bristol-Myers Squibb Company in September 2002.
Guy Dawson (05)
52, non-executive
director.
Appointed in March 2004. He was chairman of European investment banking at Merrill Lynch until 2003. Before joining Merrill Lynch in 1995 he held senior positions in Morgan Grenfell and
Deutsche Bank. He is a founding partner in Tricorn, an independent corporate advisory business that he co-founded in 2003, and he is also a non-executive director of Boots Group PLC.
Alan Ferguson (06)
47, group
finance
director.
Appointed an executive director in September 2005. Prior to joining BOC as group finance director he held a similar role with Inchcape plc, which he joined in 1983 having qualified as a
chartered accountant with KPMG. He has a degree in business economics from Southampton University.
Kent Masters (07)
44, chief executive,Industrial
and Special Products.
Appointed
an executive director in March 2005. He joined BOC in 1985 and has held positions
of increasing responsibility in engineering, marketing and general management,
most recently, president, Process Gas Solutions, north America. He holds an
engineering degree from Georgia Institute of Technology and an MBA from New York
University.
Board of directors | 09 |
Rebecca McDonald (08)
53, non-executive
director.
Appointed in July 2005. She is president, gas and power, for BHP Billiton and is a member of the BHP Billiton executive committee. She is a director of Granite Construction Company in
California.
Matthew Miau (09)
59, non-executive
director.
Appointed in January 2002. He is chairman of MiTAC-Synnex Group, one of Taiwan's leading high-tech industrial groups. He is also a Convenor of Civil Advisory Committee of National
Information and Communications Initiatives (NICI) and on the Board of Directors of the Institute for Information Industry (III),Taiwan. He obtained a BS in electronic engineering and computer science from U.C. Berkeley, an MBA from Santa Clara
University and holds an honorary doctorate degree from the National Chiao Tung University,Taiwan.
Sir Christopher
ODonnell (10)
59, non-executive
director.
Appointed
in March 2001. He is chief executive of Smith & Nephew plc. Previously he
held senior positions with Davy Ashmore, Vickers Limited and C R Bard Inc. He
has an honours degree in mechanical engineering from Imperial College, London
and an MBA from the London Business School. He is a chartered engineer and a
member of the Institution of Mechanical Engineers.
Anne Quinn CBE (11)
54, non-executive
director.
Appointed in May 2004. She is group vice president of BP's gas, power and renewables business. Previously she was managing director of BP Gas Marketing Ltd, managing director of Alliance
Gas Ltd and an executive with Standard Oil of Ohio. She has a Bachelor of Commerce degree from Auckland University and a Masters in management science from the Massachusetts Institute of Technology. She serves on the President's Advisory Committee
to the Sloan School, Massachusetts Institute of Technology.
Dr Raj Rajagopal (12)
52, chief
executive, BOC Edwards.
Appointed
an executive director in July 2000. He joined BOC in 1981 and has held several
positions in BOC Edwards including manufacturing systems manager, director of
manufacturing and managing director, being appointed chief executive in 1998.
He was appointed a non-executive director of Foseco plc in May 2005 and joined
the Council of Cranfield University in July 2005. He was appointed to The Council
of Science and Technology in
March 2004 and has chaired the Institution of Electrical Engineers Manufacturing
Sector Panel since 2003. He is a Fellow of the Royal Academy of Engineers as
well as the Institution of Mechanical Engineers, the Institution of Electrical
Engineers and the Chartered Management Institute. He has an MSc in manufacturing
technology and a PhD in mechanical engineering both from Manchester University
and an honorary degree from Cranfield University received in May 2004. He was
awarded the Sir Eric
Mensforth Manufacturing Gold Medal in March 2003. He resigned as a non-executive
director of FSI International Inc in May 2005 and resigned from the board of
the business support organisation, Sussex Enterprise, in February 2005.
Board committees | |
Audit committee | |
Remuneration committee | |
Nomination committee | |
Pensions committee | |
Executive management board | |
Investment committee |
10 | The BOC Group plc Annual report and accounts 2005 |
Executive management board
John Bevan (01)
48, chief executive,
Process
Gas Solutions since January 2003.
Appointed to the executive management board in June 2000. See page 08 for biographical details.
James Cullens (02)
42, group human
resources director since April 2005.
Appointed
to the executive management board in April 2005. He joined BOC in July 2003 and
most recently was human resources director for BOC Edwards. Prior to joining
BOC, he held a variety of senior, international HR roles in organisations including
Mars Incorporated, Asda and PA Consulting Group. He has an MA from Cambridge
University, an MLitt from Otago University, New Zealand and an MSc from Thames
Valley University.
Nick Deeming (03)
51, group legal
director and company secretary since May 2001.
Appointed to the executive management board in May 2001. He has over 18 years in-house counsel experience, including Schlumberger SEMA and Axa PPP Healthcare, specialising in corporate
and commercial law. He has a degree in law from Guildhall University, an MBA from Cranfield University and qualified as a solicitor in 1980.
Stephen Dempsey (04)
54, group director,
corporate
relations since February 1999.
Appointed to the executive management board in October 1999. He joined BOC in 1990 as director of marketing services for the UK gases business and has held various communications roles in
the Group. He has an MA in geography from Oxford University and an MBA from Cranfield University.
Peter Dew (05)
45, group director,
information
management since February 1998.
Appointed
to the executive management board in October 1999. He joined BOC in 1986. He
has held information technology roles in the Groups businesses in South Africa, the UK and
most recently as information management director for the Groups businesses
in Asia/Pacific.
Executive management board | 11 |
Alan Ferguson (06)
47, group finance director
since September 2005.
Appointed to the executive management board in September 2005. See page 08 for biographical details.
Tony Isaac (07)
64, chief executive
since
May 2000.
Appointed to the executive management board in July 1996. See page 08 for biographical details.
Kent Masters (08)
44, chief executive,Industrial
and Special Products since March 2005.
Appointed to the executive management board in December 2002. See page 08 for biographical details.
Mark Nichols (09)
48, group director,business
development since January 2004.
Appointed to the executive management board in January 2004. He joined BOC in February 1988 and held senior financial roles in the UK and US before moving into general management, most
recently as managing director, Industrial and Special Products, east Asia.
Before joining BOC he worked for Total Oil and Merck. He is a Fellow of the Association of Chartered Certified Accountants.
Dr Raj Rajagopal (10)
52, chief executive,BOC
Edwards since June 1998.
Appointed to the executive management board in July 1996. See page 09 for biographical details.
12 | The BOC Group plc Annual report and accounts 2005 |
Group five year record | |
2001 | 2002 | 2003 | 2004 | 2005 | |||||||
Profit and loss | £ million | £ million | £ million | £ million | £ million | ||||||
Turnover1 | 3,772.9 | 3,657.7 | 3,718.3 | 3,885.4 | 3,754.7 | ||||||
Total operating profit before | |||||||||||
exceptional items2 | 530.6 | 500.1 | 505.6 | 576.9 | 564.2 | ||||||
Exceptional items | (108.3 | ) | (74.5 | ) | (67.0 | ) | (17.4 | ) | (20.7 | ) | |
Total operating profit2 | 422.3 | 425.6 | 438.6 | 559.5 | 543.5 | ||||||
Profit/(loss) on termination/disposal | |||||||||||
of businesses | | (20.2 | ) | | (79.5 | ) | 98.1 | ||||
Profit on disposal of fixed assets | 3.6 | | | 4.9 | 10.5 | ||||||
Profit before interest | 425.9 | 405.4 | 438.6 | 484.9 | 652.1 | ||||||
Interest on net debt | (123.4 | ) | (103.1 | ) | (96.1 | ) | (88.4 | ) | (76.7 | ) | |
Interest on pension scheme liabilities | (107.2 | ) | (106.1 | ) | (110.2 | ) | (117.4 | ) | (128.9 | ) | |
Expected return on pension scheme assets | 166.9 | 139.1 | 119.6 | 133.2 | 147.1 | ||||||
Other net financing income | 59.7 | 33.0 | 9.4 | 15.8 | 18.2 | ||||||
Profit before tax | 362.2 | 335.3 | 351.9 | 412.3 | 593.6 | ||||||
Tax on profit on ordinary activities | (104.6 | ) | (106.2 | ) | (96.4 | ) | (101.7 | ) | (159.9 | ) | |
Profit after tax | 257.6 | 229.1 | 255.5 | 310.6 | 433.7 | ||||||
Minority interests | (33.5 | ) | (26.2 | ) | (36.4 | ) | (46.6 | ) | (66.7 | ) | |
Profit for the financial year | 224.1 | 202.9 | 219.1 | 264.0 | 367.0 | ||||||
Earnings per 25p Ordinary share | |||||||||||
Basic: | |||||||||||
on profit for the financial year | 46.0 | p | 41.4 | p | 44.5 | p | 53.5 | p | 74.1 | p | |
before exceptional items | 57.5 | p | 55.9 | p | 52.9 | p | 63.2 | p | 67.5 | p | |
Diluted: | |||||||||||
on profit for the financial year | 45.9 | p | 41.2 | p | 44.5 | p | 53.5 | p | 73.9 | p | |
before exceptional items | 57.3 | p | 55.7 | p | 52.9 | p | 63.1 | p | 67.3 | p | |
Ordinary dividends per share3 | |||||||||||
Actual | 37.0 | p | 38.0 | p | 39.0 | p | 40.0 | p | 41.2 | p | |
Number of fully paid Ordinary shares | |||||||||||
in issue at the year end (million) | 494.4 | 497.3 | 497.7 | 498.8 | 502.5 | ||||||
1. | Subsidiary undertakings only. |
2. | Including share of operating profit of joint ventures and associates. |
3. | Dividends paid in the calendar year. |
4. | Excludes exceptional items. A fuller explanation of the term adjusted, and the reasons for presenting such a measure, is given in the operating review on pages 40 and 41. A reconciliation of adjusted profit before tax to profit before tax is given in the profit and loss account on page 86. A reconciliation of adjusted return on capital employed to return on capital employed is given in the operating review on page 41. |
All turnover and operating profit arose from continuing operations.
Group five year record | 13 |
2001 | 2002 | 2003 | 2004 | 2005 | |||||||
Balance sheet | £ million | £ million | £ million | £ million | £ million | ||||||
Fixed assets | |||||||||||
intangible assets | 48.1 | 150.7 | 206.1 | 174.9 | 142.6 | ||||||
tangible assets | 3,168.6 | 3,027.4 | 2,913.4 | 2,618.4 | 2,639.9 | ||||||
joint ventures, associates and other | |||||||||||
investments | 390.3 | 426.1 | 608.6 | 548.2 | 613.9 | ||||||
Working capital | |||||||||||
(excluding bank balances and short-term loans) | 257.0 | 203.1 | 220.1 | 154.5 | 151.8 | ||||||
Deferred tax provisions | (294.3 | ) | (291.8 | ) | (279.2 | ) | (253.0 | ) | (241.9 | ) | |
Other non current liabilities and provisions | (184.3 | ) | (173.7 | ) | (145.8 | ) | (126.9 | ) | (149.7 | ) | |
Net borrowings and finance leases | (1,272.1 | ) | (1,325.6 | ) | (1,368.1 | ) | (962.4 | ) | (839.7 | ) | |
Net assets excluding pension assets | |||||||||||
and liabilities | 2,113.3 | 2,016.2 | 2,155.1 | 2,153.7 | 2,316.9 | ||||||
Pension assets5 | 107.0 | 54.3 | 50.7 | 68.9 | 88.7 | ||||||
Pension liabilities5 | (56.0 | ) | (311.0 | ) | (341.8 | ) | (344.5 | ) | (352.5 | ) | |
Net assets including pension assets | |||||||||||
and liabilities | 2,164.3 | 1,759.5 | 1,864.0 | 1,878.1 | 2,053.1 | ||||||
Shareholders capital and reserves | 2,026.7 | 1,641.6 | 1,686.7 | 1,675.3 | 1,942.0 | ||||||
Minority shareholders interests | 137.6 | 117.9 | 177.3 | 202.8 | 111.1 | ||||||
Total capital and reserves | 2,164.3 | 1,759.5 | 1,864.0 | 1,878.1 | 2,053.1 | ||||||
Other selected financial information | |||||||||||
Capital employed6 | |||||||||||
Total capital and reserves | 2,164.3 | 1,759.5 | 1,864.0 | 1,878.1 | 2,053.1 | ||||||
Non current liabilities and provisions | 478.6 | 465.5 | 425.0 | 379.9 | 391.6 | ||||||
Net borrowings and finance leases7 | 1,272.1 | 1,325.6 | 1,368.1 | 962.4 | 839.7 | ||||||
3,915.0 | 3,550.6 | 3,657.1 | 3,220.4 | 3,284.4 | |||||||
Total assets | 5,000.5 | 4,904.9 | 4,883.7 | 4,665.7 | 4,726.2 | ||||||
Long-term liabilities and provisions | 1,554.5 | 1,897.5 | 1,851.5 | 1,652.9 | 1,515.6 | ||||||
Capital expenditure1 | 352.6 | 354.3 | 281.2 | 256.1 | 397.3 | ||||||
Depreciation and amortisation1 | 329.5 | 330.9 | 333.4 | 324.0 | 301.9 | ||||||
Employees | |||||||||||
UK | 10,597 | 11,266 | 10,414 | 10,682 | 11,014 | ||||||
Overseas | 32,574 | 35,014 | 34,093 | 32,701 | 19,558 | ||||||
Continuing operations | 43,171 | 46,280 | 44,507 | 43,383 | 30,572 | ||||||
Ratios | |||||||||||
Return on capital employed8 | 10.4% | 10.6% | 10.9% | 14.9% | 15.6% | ||||||
Adjusted return on capital employed4, 9 | 13.1% | 12.5% | 12.6% | 15.4% | 16.2% | ||||||
Net debt/capital employed | 32.5% | 37.3% | 37.4% | 29.9% | 25.6% | ||||||
Net debt/equity | 58.8% | 75.3% | 73.4% | 51.2% | 40.9% | ||||||
5. | Pension assets represents the excess of pension assets over pension liabilities in countries where pension assets exceed pension liabilities. Pension liabilities represents the excess of pension liabilities over pension assets in countries where pension liabilities exceed pension assets. |
6. | As defined in note 1 b) to the financial statements. |
7. | Analysed for 2005 and 2004 in note 20 to the financial statements. |
8. | Operating profit as a percentage of the average capital employed excluding net pension liabilities. The average is calculated on a monthly basis. |
9. | Operating profit before exceptional items as a percentage of the average capital employed excluding net pension liabilities. The average is calculated on a monthly basis. |
14 | The BOC Group plc Annual report and accounts 2005 |
Group profile |
Introduction
The
BOC Group began its business life over 100 years ago as the Brins Oxygen
Company. The company was incorporated in England in 1886 and adopted its present
name on 1 March
1982.
A
technology to extract oxygen from the air in commercial quantities had just been
developed and in 1886 the Brin brothers started production at a factory in Westminster,
London. Two uses had already been found for oxygen. One was to intensify limelight,
which was then used in theatres. The other was to assist patients breathing
during and after surgery. New technology was soon developed that allowed air
to be separated into all its major components - nitrogen, oxygen and argon. By
1960, industrial gases were in widespread use and BOCs
business was firmly established. Tonnage plants were supplying steelworks with
oxygen and the customer base had been broadened to extend from metal cutting
and welding to food and medicine. The business had also spread overseas with subsidiaries
or associated companies as far away as Australia and South Africa. During the
1980s, BOCs
South African subsidiary began to invest in private hospitals. This diversification
was the basis of the Afrox hospitals segment.
BOC acquired the vacuum equipment company Edwards High Vacuum International Limited in 1968 and this formed the basis of what was to become the BOC Edwards
line of business today.
The
BOC Distribution Services business (now called Gist) was first established in
1970, initially providing a chilled food distribution service for Marks & Spencer and relying upon distribution skills and liquid nitrogen chilling technology, acquired as a result of BOCs
involvement in gases.
In
1978, BOC completed the acquisition of Airco Inc in America, a predominantly
gases business that doubled the Groups size and brought BOC for the
first time into the US gases market. In the period from 1970 to 1990 The BOC
Group significantly increased its presence in the Asia/Pacific region through
participation in several joint ventures or associated companies. BOC established
strong market positions in Thailand, Indonesia,Taiwan, the Philippines, China
and Korea.
An
investment in 1982 gave BOC effective management control of the Japanese gases
company Osaka Sanso Kogyo KK (OSK). BOCs holding in OSK was raised to
97 per cent before BOC and Air Liquide merged their industrial and medical gases businesses in Japan in January 2003. BOCs
subsidiary in Japan has retained a 45 per cent interest in the joint venture
company, which is called Japan Air Gases
Ltd.
In the period from 1998 to 2001, BOC increased investments in its gases companies in Thailand, Indonesia and the Philippines by acquiring the interests of
joint venture partners or minority shareholders.
The
BOC Group has an international portfolio of companies operating and reporting
as three lines of business. These are Process Gas Solutions (PGS), Industrial
and Special Products (ISP) and BOC Edwards. In addition two separately managed
specialist businesses,Afrox hospitals and Gist, are reported as business segments.
Until a disposal in March 2005, results for Afrox hospitals were fully
consolidated. Since then BOC has reported its 20 per cent share of this business.
BOC Process Plants was combined with Linde Engineering in the US with effect from September 2002. BOC retains an interest in the manufacture of industrial
gas equipment through its Cryostar business based in France. Cryostar makes specialist cryogenic pumps and expansion turbines that are used by most manufacturers of industrial gas plant. In recent years Cryostar has also developed a strong position
in the market for shipboard compressors and heat exchangers used aboard liquefied natural gas (LNG) tankers. Management believes that Cryostar is the leading manufacturer of its product range worldwide.
The
main exports of the Group in 2005 were special products from the UK, helium from
the US and vacuum equipment and semiconductor manufacturing equipment from the
UK, the US and Japan. Trade between Group undertakings is conducted at fair market
prices.
Analysis of results by business
(including share of joint ventures and associates)
Turnover | Operating profit | Adjusted operating profit | |||||||||||
£ million | % | £ million | % | £ million | % | ||||||||
Process Gas Solutions | 1,466.3 | 32 | 207.2 | 38 | 207.2 | 37 | |||||||
Industrial and Special Products | 1,721.7 | 37 | 289.4 | 53 | 289.4 | 51 | |||||||
BOC Edwards | 826.0 | 18 | 17.4 | 3 | 38.1 | 7 | |||||||
Afrox hospitals | 275.1 | 6 | 37.2 | 7 | 37.2 | 7 | |||||||
Gist | 315.9 | 7 | 24.5 | 5 | 24.5 | 4 | |||||||
Corporate | | | (32.2 | ) | (6 | ) | (32.2 | ) | (6 | ) | |||
4,605.0 | 100 | 543.5 | 100 | 564.2 | 100 | ||||||||
Adjusted operating profit excludes exceptional items. See also pages 40 and 41 of the operating review. |
The BOC Group contributes to the economies of some 50 countries throughout the world. The UK is the largest single source of sales revenue for the Groups products and services, followed by the US. Other major geographic areas for the Group are Australia, South Africa, Japan and other markets in the Asia/Pacific region. The business therefore operates from a broad geographical base with local manufacturing in most of the key overseas markets.
Group profile | 15 |
Analysis of results by region
(including share of joint ventures and associates)
Turnover | Operating profit | Adjusted operating profit | |||||||||||
£ million | % | £ million | % | £ million | % | ||||||||
Europe | 1,300.8 | 28 | 138.6 | 25 | 143.7 | 25 | |||||||
Americas | 1,222.1 | 27 | 84.4 | 16 | 100.0 | 18 | |||||||
Africa | 586.0 | 13 | 91.3 | 17 | 91.3 | 16 | |||||||
Asia/Pacific | 1,496.1 | 32 | 229.2 | 42 | 229.2 | 41 | |||||||
4,605.0 | 100 | 543.5 | 100 | 564.2 | 100 | ||||||||
Adjusted operating profit excludes exceptional items. See also pages 40 and 41 of the operating review. |
The UK accounts for the largest part of the Groups activities in Europe but BOC has significant gases subsidiaries in Ireland and Poland, vacuum products manufacturing in France and
a pharmaceutical packaging machinery operation in the Netherlands.
Gist,
BOCs supply chain solutions business, operates principally in the UK but
also has operations in other countries.
Subsidiaries
in the US are engaged in the Groups three lines of business. The Groups
other principal subsidiaries, joint ventures and associates in the Americas are
located in Canada,Venezuela, Colombia, Chile and Mexico.
The
largest Group subsidiary in Africa is African Oxygen Limited (Afrox), a South
African public company in which the Group owns 56 per cent of the equity. The
largest shareholder, other than BOC, holds less than 15 per cent of the equity.
Afrox, primarily through wholly-owned subsidiaries, is engaged in the manufacture
and sale of products within the PGS and ISP lines of business. Afrox also has
a 20 per cent interest in private hospitals, clinics and other health care services
in southern Africa.
There
are other Group or Afrox subsidiary companies in Africa located in Botswana,
Kenya, Malawi, Mozambique,
N amibia, Nigeria, Swaziland,Tanzania, Uganda, Zambia and Zimbabwe. These companies
are engaged primarily in the manufacture and/or sale of products in the ISP line
of
business.
BOC
has businesses in most of the Asia/Pacific markets, including Japan, Korea,Thailand,Taiwan,
Indonesia, Malaysia, Singapore, China, the Philippines, India, Pakistan, Bangladesh,Australia
and New Zealand. In Australia, the Groups business is conducted by BOC
Limited. This company, as well as its subsidiaries, joint ventures and associates,
is engaged in the manufacture and sale of products in the PGS and ISP lines of
business. BOC participates in the liquefied petroleum gas market in Australia
through a 50 per cent shareholding in Elgas Limited. Elsewhere in the Pacific
region, the Group conducts its business through subsidiaries,
joint ventures and associated companies.
Management organisation
BOCs management structure is based on three global lines of business and, throughout the period 2003 to 2005, on two specialist businesses. Each line of business serves a clearly
defined type of customer and each pursues its own strategy for growth and performance at a local level. The organisation is designed to maximise BOCs
global as well as local strengths. The lines of business have global responsibility
to set strategy and prioritise investment. They include operational business
units and these local units are responsible to the Group chief executive for
delivering financial, safety and operational performance. The business units contribute
to the
development of the strategies of the lines of business and customise and implement
them in local markets. The business unit heads collaborate in order to share best
practice and to maximise growth and profit opportunities wherever they may
appear.
Process
Gas Solutions (PGS) manages all aspects of BOCs business with customers
requiring bulk supplies of industrial gases from on-site plants or by pipeline
as well as deliveries of liquefied gases. Typical customers are found in the
oil and chemicals, food and beverage, metals, and glass sectors all round the
world.
Marketing, business development and the execution of investments to provide
customer specific solutions for the supply of industrial gases are handled by
Process Systems, which forms part of PGS.
Industrial
and Special Products (ISP) covers BOCs business with customers in the fabrication,
medical and leisure sectors as well as the special products and liquefied petroleum
gases businesses.
BOC Edwards embraces all aspects of business with semiconductor industry customers worldwide including the supply of bulk gases and electronic materials,
vacuum and abatement technology, chemical management systems and semiconductor-related services. BOC Edwards also serves general vacuum markets around the world and manufactures pharmaceutical freeze-drying and packaging machinery.
The
segment reported as Afrox hospitals operated through Afrox Healthcare Limited
up to the end of March 2005. It owned and managed private hospitals and clinics
in southern Africa. BOCs majority-owned subsidiary, African Oxygen Limited
(Afrox), held 69 per cent of Afrox Healthcare Limited (AHealth) when the company
was sold to a consortium led by two major black economic empowerment investors
in March 2005. Afrox has retained a significant interest in the hospitals business
through a 20 per cent holding in the new company.
In
2001, BOC Distribution Services was re-named Gist to reflect the changing nature
of its business. Gist operates as a separate business unit outside the lines
of business structure. It remains focused on developing business with major customers,
including Marks & Spencer, and has developed capability in supply chain consultancy
and end-to-end supply chain solutions.
16 | The BOC Group plc Annual report and accounts 2005 | Group profile |
Corporate development
Over the last three years BOC has continued to invest in its core businesses at the same time as divesting assets and businesses that were no longer consistent with its strategy.
In October 2002, BOC acquired Environmental Management Corporation (EMC), a privately owned water services company based in St Louis, Missouri. EMC manages
water and wastewater treatment facilities for both industrial and local municipal customers around the US. EMC forms part of the PGS line of business, which is expanding the range of solutions offered to its industrial customer base.
BOC
and Air Liquide merged their industrial and medical gases businesses in Japan
in January 2003 and BOCs subsidiary in Japan has retained a 45 per
cent interest in the combined company called Japan Air Gases Ltd.
At the end of January 2003, BOC acquired the partial oxidation syngas plant at Clear Lake,Texas, from Celanese. Under the agreement BOC fulfils a significant
proportion of the industrial gas requirements for the Celanese chemical facility at Clear Lake.
In March 2003 BOC announced an agreement to purchase the Canadian packaged gas and related welding equipment business of Air Products. The acquisition was
completed in April 2003 following approval from the Canadian regulatory authority.
In June 2003, BOC announced an agreement to obtain half the output of a new helium extraction facility to be constructed in Qatar. Deliveries from the new
source are now scheduled to commence during 2006.
In
May 2004 BOC agreed to buy Duke Energys 30 per cent ownership interest in the Cantarell joint venture company for US$59.7 million in cash. This
increased BOCs overall stake to 65 per cent on completion in September
2004. This company supplies Pemex with nitrogen for the pressurisation of its
oilfields in the Gulf of Mexico.
BOC
completed the disposal of the packaged gas part of its US ISP business to Airgas
Inc on 30 July 2004. The initial consideration received was US$175 million in
cash and a final payment of US$20 million that had been subject to performance
conditions was recognised in 2005. These funds were received in November 2005.
All packaged gases and associated hardgoods were included in the sale. This
comprised compressed industrial, speciality (excluding electronic) and medical
gases in the US, sold through BOC retail and distributor channels. The sale did
not include BOCs bulk liquid helium, bulk medical gases and distributor
businesses.
In
October 2004, BOC purchased a 50 per cent holding in Asia Union Electronic Chemical
Corporation (AUECC). This acquisition expanded BOC Edwards electronic materials
offering to include the purification, blending, packaging and distribution of
wet chemicals for flat panel display, semiconductor and solar cell manufacturers
throughout Asia.
In December 2004, BOC sold its shares in Unique Gas and Petrochemicals thereby divesting interests in the LPG and bulk ammonia businesses in Thailand but the
cylinder and aqueous ammonia business was retained.
At
the end of January 2005, BOC acquired Calor Gas Limiteds UK aerosol propellants business. This includes the sales, marketing and distribution of bulk
and packaged propane, isobutene and butane blends in the UK. The acquisition also included Calors
CARE range of hydrocarbon refrigerants.
The
segment reported as Afrox hospitals operated through Afrox Healthcare Limited
up to the end of March 2005. It owned and managed private hospitals and clinics
in southern Africa. BOCs majority-owned subsidiary, African Oxygen Limited
(Afrox), held 69 per cent of Afrox Healthcare Limited (AHealth) when the company
was sold to a consortium led by two major black economic empowerment investors
in March 2005. Afrox has retained a significant interest in the hospitals business
through a 20 per cent holding in the new company.
In
September2005, Gist acquired G Van Dongen Holding BV, a European temperature-controlled
transport operator. The business, which had an annual turnover of some 46 million
euros, expands Gists existing primary food business into continental Europe
by providing fresh chill and ambient transport services to food manufacturers
in the Netherlands, Spain, Germany, Portugal and France.
Industrial gases
The BOC Group is one of the major producers of industrial gases in the world. Its products include the atmospheric gases (nitrogen, oxygen and argon) produced by air separation plants as
well as hydrogen, carbon monoxide and syngas (a mixture of hydrogen and carbon monoxide) made by technologies including steam-reforming or partial oxidation of hydrocarbons. The Group also markets carbon dioxide, helium and liquefied petroleum
gas. These are generally derived as by-products from chemical processes or from natural sources and are also purchased from other producers. In addition, the Group markets dissolved acetylene and a wide range of special gases, medical gases, gas
mixtures and gaseous chemicals.
Industry structure
and consolidation The
industrial gases business is capital-intensive, with increasing demand, together
with economies of scale, leading to the need for large production units and
distribution networks. The need for fixed asset investments, the trend towards
global customers and the benefits from the transfer of applications technology
worldwide have
resulted in the business being handled by a relatively small number of companies
internationally.
One
or more of the other major international producers compete in each of the industrial
gases markets served by the Group, and in many of the markets there are smaller
local producers as well. International competitors include Air Liquide, Praxair,
Air Products and Chemicals, Linde and Nippon Sanso. The world market for gases
and
related products is estimated to be some £25 billion a year.
Group profile | 17 |
Principal industrial
gas products Nitrogen
possesses two key characteristics that make it the worlds most widely used
and versatile industrial gas. Nitrogen is almost inert and when liquefied it
is intensely cold. This makes liquid nitrogen a highly effective, versatile and
non-polluting agent for freezing and chilling.
Under
normal conditions nitrogen is chemically inactive. This makes it an important
purging and blanketing gas in the chemical and refining industry as well as
in the electronics industry.
Oxygen, in contrast to nitrogen, is useful for its reactivity. It supports combustion and it supports life. Oxygen has been used in welding and medicine for
over 100 years and in steel production since the 1950s.
Iron
and steel producers use oxygen to accelerate melting and to improve metal quality
during the refining process. It is also used by the oil and chemicals industries
and many others for a variety of oxidation processes. Mixed with fuel gases,
oxygen provides a heat source for many welding, cutting and metal fabrication
processes.
Argon makes up less than one per cent of the atmosphere but it is the most abundant truly inert gas. It is used to provide a shielding atmosphere in welding,
metal fabrication, aluminium processing, microelectronics, glass coating, advanced ceramics and other industrial processes. It is also used in the steel industry, principally in the production of stainless steel.
Hydrogen is typically produced by steam reforming or partial oxidation of natural gas, petroleum gas, or liquid or solid hydrocarbon feedstocks. Hydrogen may
also be recovered from by-products purchased by BOC from external suppliers. Hydrogen is used primarily in the oil and chemicals industries for applications aimed at upgrading crude oil through hydrocracking to form lighter fractions and to remove
sulphur in the production of cleaner fuels. The chemicals industry also uses hydrogen where it is required as an active ingredient in many large-scale processes.
Helium
is extracted from natural gas deposits. Only a few sources in the world contain
a sufficient proportion of helium to justify its separation. The
Groups supplies now come from the US, Poland and Russia and are secured
by long-term contracts. In June 2003, BOC announced an agreement to obtain half
the output from a new helium extraction facility to be constructed in Qatar.
Deliveries from this new source are now expected to begin in 2006. Due to its
high value, helium is the only major industrial gas to be extensively traded
internationally. Helium is used in welding, leak detection, hospital MRI scanners
and in the production
of optical fibres. Helium gas mixtures are used in balloons.
Carbon
dioxide supplied by BOC is obtained as a by-product from other companies manufacturing
processes, from natural sources or recovered in the generation process for hydrogen
or syngas and put to constructive use. Solid carbon dioxide is, like liquid nitrogen,
used for chilling and freezing in the food industry. As a gas it is used to carbonate
and dispense beverages of all kinds.
Acetylene is normally supplied in cylinders and used together with oxygen in metal cutting and welding applications. BOC is a major manufacturer of dissolved
acetylene.
Liquefied petroleum gas (LPG) is a fuel gas with a wide variety of domestic, industrial and transport applications. BOC is a major distributor of LPG in
South Africa, and its joint venture company Elgas Limited is a major distributor in Australia. BOC has smaller market positions in several other countries.
Production of industrial
gases Oxygen
was first extracted from the atmosphere by a chemical process. This was
superseded over 80 years ago by the cryogenic (low temperature) process
involving the liquefaction and distillation of air. The cryogenic process
is still by far the most widely used, but non-cryogenic techniques (pressure
swing adsorption and membrane diffusion),
which were first developed during the 1970s, are becoming increasingly significant
for smaller or less demanding on-site applications.
Cryogenic
air separation is a mature and stable technology, although incremental technical
advances are still yielding improvements in capital cost, operating cost, ease
of operation and reliability. The only significant raw material,
apart from the air itself, is electricity, which is used in large quantities
to drive compressors, pumps and other equipment. The production process in
modern air separation plants is highly automated, and remote operation of
BOCs
plants from control centres is becoming increasingly common.
The production of hydrogen and syngas uses steam reforming or partial oxidation of hydrocarbon feedstocks such as natural gas, petroleum or coal to separate
the hydrogen and carbon compounds. The choice of feedstock is related to their prices in local markets.
Distribution of industrial
gases Industrial
gases may be supplied to customers in a variety of ways; through pipelines from
on-site or nearby cryogenic or non-cryogenic plants, by deliveries of liquefied
gases in road or rail tankers, in portable cryogenic containers or in cylinders
(also called compressed or packaged gases).
Distribution
is an important competitive factor in the industrial gases business and the methods
of distribution vary according to the nature of the products themselves and the
customers volume requirements. Most gases have to be stored and distributed
either under great pressure, which requires them to be carried in heavy and bulky
cylinders, or at extremely low temperatures in specially insulated tankers,
which limits how far they can be transported before carriage costs become unacceptable.
Pipeline delivery involves high capital costs and the routing is inflexible.
As a result, there is little international trade in industrial gases.
Production has to occur in or near the market being served and there is a trend
towards production at customers own
sites.
Business segments
The BOC Group reports financial results for the three lines of business and for Afrox hospitals and Gist separately.
18 | The BOC Group plc Annual report and accounts 2005 | Group profile |
Process Gas Solutions (PGS)
This line of
business covers BOCs business with larger-scale industrial customers
worldwide, typically in the oil and chemicals, food and beverage, metals, and
glass sectors. Gases and services are supplied as part of customer-specific
solutions that create the most value for customers at the lowest cost to BOC. These
range from supply by pipeline or from dedicated on-site plants to the largest
users, to supply by road tanker
in liquefied form to others.
Tonnage
(pipeline) customers are usually supplied on the basis of long-term contracts,
typically containing a fixed facility charge together with a variable charge
for product supplied in excess of a set minimum quantity. Revenues from these
contracts thus have a measure of stability with respect to changes in demand
for product. Tonnage plants are often built to produce merchant gases in addition
to
those required by the tonnage customer and these gases can be sold to other customers.
The BOC Group has substantial positions in the tonnage markets of the UK, the
US,Australia, South Africa and Asia as well as in some smaller markets. The
products supplied to tonnage customers have traditionally been the atmospheric
gases oxygen, nitrogen and argon. More recently, hydrogen and syngas are becoming
significant tonnage products as are associated utilities including steam and
power.
The
delivery of liquefied gases by road or rail to the customers site is normally
limited by transport costs to a radius of about 200 miles. Product for this market
is supplied either from merchant plants or from tonnage plants incorporating
liquefiers. Larger users are typically supplied with product in liquid form delivered
in cryogenic tankers into special storage vessels installed at
customer premises. Tankers and vessels are often BOC Group owned. Liquefied gases
are usually supplied on the basis of contracts with terms of one to five years.
Revenues are generally based upon the actual quantity of gas consumed, with an
additional fixed charge for the use of storage equipment.
The growth of sales and profit in this line of business is driven by investment in new production facilities. Such investment is predominantly the result of
opportunities to satisfy long-term supply contracts with one or more heavy industrial customers for each plant.
Marketing, business development and the execution of investments to provide customer-specific solutions for the supply of industrial gases are handled by
Process Systems, which forms part of PGS.
Business development In October 2002, BOC acquired Environmental Management Corporation (EMC), a privately owned water
services company based in St Louis, Missouri. EMC manages water and wastewater treatment facilities for both industrial and local municipal customers around the US. EMCs management services extend to steam systems, cold and chilled water
systems and wastewater treatment. Customers include small to medium-sized municipalities and industrial customers, many of which are in the food sector. EMC forms part of the PGS line of business and BOCs strategy is to expand the range of
solutions offered to its industrial customer base.
At
the end of January 2003, BOC acquired the partial oxidation syngas plant at Clear
Lake,Texas, from Celanese. Under the agreement BOC fulfils a significant proportion
of the industrial gas requirements for the Celanese chemical facility at Clear
Lake. The Celanese facility is located on the Houston ship canal, and includes
a world scale vinyl acetate monomer plant and the worlds largest acetic
acid plant. These require large quantities of oxygen and nitrogen as well as
carbon
monoxide.
A new hydrogen and carbon monoxide (HyCO) plant supplying the Thai Polycarbonate Company for the manufacture of plastic resins began production in
2003.
In
October 2003, BOC commissioned a new hydrogen plant supplying Citgos oil
refinery at Lemont, Illinois. The hydrogen is used in the removal of sulphur
to produce clean fuels.
In the same month BOC, and its joint venture partners, announced plans to invest over US$100 million in developing three schemes in China, at Taiyuan, Suzhou
and in the Pearl River region.
BOC-TISCO,
the joint venture between BOC Gases and Taiyuan Iron and Steel Corporation (TISCO),
has under construction two new air separation units (ASUs) to supply 1,400 tonnes
a day of oxygen each to TISCOs plant in Shanxi province in north-central
China. The new ASUs represent an investment of US$82 million and they are scheduled
to begin coming on stream during 2006. This investment is in response to strong
demand for stainless steel in China and will support TISCOs
vigorous expansion plans.
Pearl
River Gases (PRG), a joint venture between Guangzhou Iron & Steel (GIS) and
BOCs joint venture, Hong Kong Oxygen, invested in two further
ASUs during 2005. These add some 400 tonnes a day of oxygen capacity to
support the expansion of steelmaking in southern China.
Also
in 2005, BOCs wholly owned subsidiaries in Suzhou constructed new on-site
supply scheme pipelines to meet increasing demand for industrial gases from key
customers in Suzhou Industrial Park and the Suzhou New District Industrial Park.
A
new hydrogen plant to supply both a Sunoco refinery, and a nearby BP refinery
is under construction at Toledo, Ohio. The hydrogen will be used by both BP and
Sunoco in the production of ultra-low sulphur gasoline and diesel fuels. The
complex will be capable of supplying over 120 million standard cubic feet a day
of hydrogen.
BOCs partner for engineering and construction is Linde BOC Process
Plants of Tulsa, Oklahoma. BOC is investing more than US$100 million in the facility.
In
May 2004 BOC agreed to buy Duke Energys 30 per cent ownership interest
in the Cantarell joint venture company for US$59.7 million in cash. This increased
BOCs overall stake to 65 per cent on completion in September
2004. This company supplies Pemex with nitrogen for the pressurisation of its
oilfields in the Gulf of Mexico.
In
December 2004, BOC announced a new, 20-year agreement to supply an additional
300 million standard cubic feet a day (scf/d) of nitrogen to be used at the
Cantarell and Ku Maalob Zaap oil fields. The additional supply will lift the
total nitrogen output by 25 per cent to 1.5 billion scf/d at the site. Construction
of a fifth production module has commenced and the new facility is scheduled
to begin
production in 2007.
Group profile | 19 |
In China, significant
new business was won in the chemical sector. BOC has agreed to form a joint venture
with the Sinopec Shanghai Petrochemical Company (SPC) at Jinshan, near the Caojing
chemical complex, to invest in existing assets and then add further air separation
capacity to satisfy the industrial gases requirements of SPC in the region. This
follows the establishment in 2003 of a similar joint venture with Sinopec YPC
to supply the Sinopec and BASF joint venture petrochemical complex at Nanjing.
BOCs
subsidiary in Thailand is investing in a venture establishing a 1,300 tonnes-a-day
plant to supply TOC Glycol Co. Ltd. (TOCGC) in Map Ta Phut and to increase merchant
capacity in the area. When completed in 2006, this will be the largest air separation
unit in Thailand. It will be owned and operated by a joint venture between BOCs
Thai subsidiary,TIG, and Bangkok Industrial Gas
Company.
In
January 2005 BOC formed a joint venture with Maanshan Iron & Steel Company
(Ma Steel) to invest initially in the construction of two large air separation
units. Each will be capable of supplying 1,400 tonnes a day of oxygen to meet
the growing needs of Ma Steel in Maanshan City, China. Total production of oxygen,
nitrogen and argon is expected to total some 5,000 tonnes a day when
commissioned during 2007.
At the same time
BOC India Ltd announced that it had been awarded a contract to supply gases requirements
of approximately 1,400 tonnes a day for an expansion programme by Jindal Vijaynagar
Steel Limited at Bellary in southern India. A plant with an oxygen capacity of
855 tonnes a day will be constructed and is expected to be commissioned in 2006.
In
April 2005, BOC agreed to invest approximately US$40 million in equipment and
pipelines in order to supply hydrogen to Valeros 170,000 barrel a day
refinery at Lima, Ohio and to supply other customers in the area. Construction
of the plant has begun and it is expected to start supplying hydrogen during
2006.
In
June 2005, BOC announced further refinery hydrogen business in the US with the
proposed investment of nearly US$50 million at Salt Lake City to supply Chevron
and Holly Corporations Utah subsidiary with hydrogen for cleaner fuels
production at their refineries. The refiners are upgrading their facilities in
accordance with the US Environmental Protection Agencys
lower-sulphur
requirements for gasoline and diesel fuels.
Chevron
is installing additional hydrotreating capacity at its 49,000 barrel per day
(bpd) refinery and will take hydrogen and steam from BOCs plant,
which will be located on the Chevron site. Holly will also receive hydrogen for
new hydrotreating capacity at its nearby 26,000 bpd Woods Cross refinery through
a five-mile pipeline connection from the BOC facility.
Construction of the hydrogen plant has started and production is expected to begin in 2006.
Industrial and Special Products (ISP)
Gases for cutting
and welding, hospitality, laboratory applications and a variety of medical purposes
are mainly distributed under pressure in cylinders. The ISP line of business
covers products and services provided to this section of the market together
with sales of packaged chemicals and liquefied petroleum gas (LPG). Customers
are typically in the fabrication, engineering, automotive, refrigeration, hospitality
or medical
sectors. The customer base is therefore broad and varied. The number of separate
customers served by ISP is much greater than the other two lines of business
and the quality of service is often the key factor in securing existing or obtaining
new customers. In order to raise service standards at the same time as reducing
costs, national customer service centres have been successfully established in
all the major markets.
In
addition to supplying gases, BOC also supplies a range of associated equipment
in many of its major markets. This includes cutting and welding products and,
in some markets, associated safety equipment.
BOC has devoted considerable attention over the last few years to understand the requirements of different types of customer in its major markets and to
provide the required service at an appropriate price. Such customer segmentation programmes have been implemented in the UK, South Africa,Australia,Asia, Latin America and are in progress elsewhere.
The
cutting and welding applications are a relatively mature part of the industrial
gases business and growth opportunities are principally in other segments of
the market such as medical applications, safety products, packaged chemicals,
hospitality and services. BOC is pursuing these opportunities by the development
of new products, packages and services as well as by marketing initiatives to
take
advantage of BOCs global capabilities by introducing existing products
to new regions. Electronic commerce has also become an important tool for sustaining
and growing sales by making it easier for customers to manage their business
with BOC
as a supplier.
BOC is a leading supplier of helium and has liquid helium distribution centres, or transfills, in many markets around the world. With 48 helium transfills in
its global network, management believes that this is the largest of its kind. Helium has a broad range of applications, including welding and the refrigeration of medical scanner magnets, and is vital to the production of optical fibres,
semiconductors and special alloys. It is also used for leak detection, underwater breathing mixtures and lifting.
Business development In
April 2002, BOC acquired Matheson Gas Products Canada Inc, one of Canadas
leading providers of special gases and equipment. Unique Gas and Petrochemicals
Public Company Limited (UGP), a leading distributor of liquefied petroleum gas
(LPG) and ammonia in Thailand, was acquired in May 2002. BOCs associated
company in Malaysia acquired 35.6 per cent of the gases company Nissan Industrial
Oxygen Inc (NIOI) in March 2002 and, following a tender offer, increased its
holding to 100 per cent in September 2002. At the end of August 2002, BOC announced
an agreement to purchase
Praxairs Polish gases business. The transaction was completed in January
2003 following approval by the Polish competition authority. The business acquired
includes a high proportion of ISP sales.
Since 2002, BOC has continued its global roll-out of a light-weight medical cylinder with an integrated valve and regulator for homecare patients and
emergency services. Heliox, a helium and oxygen mixture formulated to ease the respiratory effort associated with airway obstruction, was launched in the UK and in some other markets.
20 | The BOC Group plc Annual report and accounts 2005 | Group profile |
Capacity at BOCs Otis, Kansas, helium plant was expanded in 2002 to match market demands. In addition, BOC has access to helium produced by other US plants, as well as to product
from Poland and Russia. In 2003 BOC and KRIO, a division of the Polish Oil and Gas Company, entered into a new helium supply agreement. BOC will purchase for export all of KRIOs helium that is not sold to its domestic customers in Poland. BOC
has been KRIOs sole customer for bulk liquid helium since the original agreement was signed in 1972. In June 2003, BOC announced an agreement to obtain half the output from a new helium extraction facility to be constructed in Qatar.
Deliveries from this new source are now expected to begin in 2006.
Magnetic
resonance imaging (MRI) systems use liquid helium to cool superconducting magnets.
BOC provides helium as well as a liquid nitrogen filling service to meet MRI
operators total requirements. In 2002, ISP signed a major helium supply
scheme with Oxford Magnet Technology (now Siemens) in the UK.
BOC continued to invest in refrigerant filling facilities and in 2003 new filling facilities were installed in Hong Kong, Malaysia and the Philippines. Each
of these was built to a standardised global design. BOC now supplies refrigerants in 19 countries compared with six countries in 1999. In June 2003, BOC announced a global alliance with Hudson Technologies to promote technology for cleaning and
recycling used refrigerants.
Significant
progress in developing web-based customer portals has been made. Amongst others,
ISP has launched customer portals in the UK,Australia and New Zealand. Thousands
of customers are now able to access detailed material on BOCs product service
offers, manage and settle their accounts and place orders on-line.
BOC acquired the Canadian packaged gas and related welding equipment business of Air Products in April 2003.
BOC
completed the disposal of the packaged gas part of its US ISP business to Airgas
Inc on 30 July 2004. The initial consideration was US$175 million in cash and
a final payment of US$20 million that had been subject to performance conditions
was received in November 2005. All packaged gases and associated hardgoods were
included in the sale. This comprised compressed industrial, speciality (excluding
electronic) and medical gases in the US, sold through BOC retail and distributor
channels. The sale did not include BOCs bulk liquid helium, bulk medical
gases and distributor businesses.
In December 2004 BOC sold its shares in Unique Gas and Petrochemicals, thereby divesting interests in the LPG and bulk ammonia businesses in Thailand but the
cylinder and aqueous ammonia business was retained.
In
January 2005, BOC acquired Calors aerosol propellants business in the UK. This includes sales and distribution of bulk and packaged hydrocarbon
blends together with Calors CARE hydrocarbon refrigerants range and propylene
business.
In March 2005, BOC announced plans to build a new liquid plant to extract helium from a natural gas supply at Darwin,Australia. When it begins production in
2007, it will be the only helium production plant in Australia, and will serve not only domestic Australian demand but also customers in New Zealand and Asia.
BOC Edwards
This line of business
specialises in gases, services and equipment for the semiconductor industry as
well as vacuum products for a range of other industries. The major markets for
BOC
Edwards products are in Asia, north America and Europe. Until September
2005 it was organised into four customer-facing divisions for sales and marketing
in Asia/Pacific, Japan, the US and Europe and into four manufacturing divisions,Vacuum
and Exhaust Management, Chemical Management, Bulk Gases and Electronic Materials.
Kachina (semiconductor process tool component management service), Coating Technology
and Pharmaceutical Systems were managed separately. BOC Edwards is now organized
around five global business units, Electronic Materials, Electronic Bulk Gases,
Semiconductor Equipment, General Vacuum Equipment and Pharmaceutical Systems.
Management believes that BOC Edwards has a unique position as a fully integrated supplier of gases, vacuum, chemical, slurry and exhaust management products,
as well as services to the global semiconductor industry and is a leader in the design and manufacture of vacuum pumps, instrumentation and systems for both general vacuum and semiconductor applications and of freeze-drying systems for the
pharmaceutical industry.
The vacuum and exhaust product ranges are manufactured or assembled primarily in the UK, with additional manufacturing and assembly in the US, Japan,
Korea,China and Brazil. They include vacuum pumps, coating systems, exhaust management systems, temperature control systems and heat exchangers, instrumentation and controls, vacuum accessories and leak-detection equipment. The range also includes
specially designed systems for specific applications, depending on customer requirements.
BOC Edwards also specialises in the design, manufacture and installation of the systems used to deliver liquid process chemicals, including planarisation
slurries to the point of use within semiconductor fabrication facilities. Manufacture of these products is located mainly in the US.
In addition to the semiconductor industry, the leading customers are in the chemicals, scientific instruments and other industries, as well as in educational
and research establishments. General vacuum products are sold to such customers by a separate sales force.
BOC
Edwards service facilities, including plants for cleaning semiconductor
process tool parts, are located near concentrations of semiconductor fabrication
facilities around the world.
Technology is important to maintain a competitive edge in this business, and considerable resources are committed to enable the business to address new
applications and markets. The major research centres are in the UK, north America and Japan.
The
Groups vacuum products are sold directly by Group companies to end-users
and also through distributors and agents. Management believes that the Group
is a leading manufacturer of the types of vacuum products that it makes and provides.
The business is highly competitive, with product design and quality, leading
to
the lowest cost of ownership, being very significant factors.
Group profile |
21 | |
Sales opportunities for much of BOC Edwards semiconductor equipment business are dependent upon capital investment by the semiconductor industry. Management believes that
semiconductor production remains on a long-term growth trend but capital investment by semiconductor manufacturers has been subject to sharp variations for a number of reasons, some of which arise from advances in technology.
The products of BOC Edwards Pharmaceutical Systems are tailored specifically to individual customer requirements in the pharmaceutical industry and are used
mainly for injectable products. Freeze-drying systems are made in Tonawanda, New York, US. Filling, sterilising and packaging lines for the pharmaceutical industry are made at Dongen in the Netherlands and Beijing in China.
Business development Throughout
the period 2003 to 2005, new ranges of dry pumps for the semiconductor industry
were introduced as well as a comprehensive new range of exhaust management products. These
new products meet the needs of 300mm wafer and flat panel manufacturing facilities.
In 2004 a new range of high-speed iGX pumps were introduced, offering attractive features for semiconductor applications such as small size, reduced power
consumption and lower lifetime costs.
The range of exhaust management products was also expanded with new burners, wet scrubbers and an advanced plasma-based system for the destruction of
reaction products without the use of methane fuel.
Production of nitrogen trifluoride (NF3) gas for the semiconductor industry was started at a plant in South Africa during 2000 and production capacity was further increased during 2003. This product is an important etchant that is also used
for in-position cleaning of semiconductor process equipment.
On-site fluorine generators were installed at a number of semiconductor and flat panel display manufacturing facilities during 2004 and a fab-wide pilot
programme at LG Philips in Korea was extended during 2005.
BOC
Edwards range of electronic materials in Asia was expanded in October 2004
with the addition of ultra-pure wet chemicals through a partnership with Asia
Union Electronic Chemical Corporation (AUECC) and through that company with Huayi,
a chemical manufacturer in China.
Afrox hospitals
African Oxygen Limited (Afrox) sold its 69 per cent controlling interest in its hospitals business (Afrox Healthcare Limited) to a consortium led by two major black economic empowerment
investors in March 2005. Afrox has retained a significant interest in the hospitals business through a 20 per cent holding in the new company.
In the period 2003 to 2004 and in 2005 prior to the disposal,Afrox Healthcare Limited owned 60 hospitals and clinics and had a minority interest in a further
seven hospitals managed by others. It also managed the Lifecare group of chronic-care hospitals. In addition to hospitals and clinics, which were the core business,Afrox Healthcare Limited also included Afrox Healthcare Services, which facilitated a
direct medicines service for chronic medication, and provided occupational health services, nursing training and laboratory services.
Gist
Gist is a provider
of specialist supply chain solutions. The name Gist was adopted during 2001 to
reflect both the continuing focus on supply chain operations and an increased
emphasis on supply chain consulting, end-to-end supply chain solutions and logistics
support to e-fulfilment opportunities. This realignment of the business followed
a planned withdrawal from most non-Marks & Spencer primary temperature controlled
operations
in the period 1999 to 2000.
High
quality supply chain operations remain at the core of the business. Gist manages
a range of supply chains on behalf of retailers, mainly in the UK, as well as
some overseas. For over 30 years Gist has been the largest supply chain provider
for Marks & Spencer. Gist currently handles all of its UK food distribution
and the consolidation and dispatch of all overseas shipments to subsidiaries
and
franchised operations.
During
2003, Gist ceased to operate general merchandise logistics and garment stockholding
operations on behalf of Marks & Spencer.
Gist
has provided supply chain consultancy services to major supermarket and catalogue
retailers in the UK and demonstrated its capabilities in managing international
supply chains. In addition an on-line wholesaling operation has extended the
range of Gists skills offered externally.
During
September 2005, Gist expanded its primary business in continental Europe with
the acquisition of G Van Dongen Holding BV, a temperature-controlled transport
operator based in the Netherlands and Spain. This is to provide chilled and ambient
transport to food manufacturers in the Netherlands, Spain, Germany, Portugal
and France, and adds to Gists existing operations in the Czech Republic
and the Netherlands.
22 | The BOC Group plc Annual report and accounts 2005 |
Strategy |
The BOC Group has an annual planning cycle culminating in a board review, typically held in March each year. The strategy is aligned with the Group objectives, published in 2004, which are:Over a sustained period, consistently to outperform our peers in terms of safety, customer service, revenue growth, earnings and cash generation. We will be the employer of choice for all existing and future employees.
Since 2000, the main components of the strategy have been: |
|
• | To establish a leading position for BOC in growth markets: BOC has continued to invest in production and infrastructure facilities in the growth markets of Asia in general and China in particular. It has also expanded by acquisition, notably adding to its gases businesses in Poland and Canada and increasing BOC Edwards range with the turbomolecular pump business of Seiko Instruments. Each line of business additionally has its own growth strategies; in Process Gas Solutions the emphasis has been on increasing the percentage of tonnage business, particularly in the refining and chemicals sectors. |
• | To improve the return on capital employed: BOC has actively pursued opportunities to improve or divest underperforming assets resulting in, amongst others: the formation of Linde BOC Process Plants LLC in the US; the combination of OSK with part of Air Liquide Japan to form Japan Air Gases; and the sale of the US packaged gas business. |
• | To improve business and operational efficiency: BOC has sponsored cost reduction and improved efficiency programmes across all of its operating entities. |
• | To maximise the benefits of BOCs operating model: BOCs structure of lines of business and business units allows global strategies to be implemented successfully while enabling local response to be tailored to local market needs. The operating model has now been extended to all parts of the world, with Asia being the most recent. |
• | To recruit, retain and develop the best people: BOC has developed a wide range of people programmes to ensure it has the calibre and quantity of people needed to implement its growth strategy successfully. |
The components of the strategy are referred to elsewhere in this annual report, notably in the sections on employees, operating review and financial review.
23 |
Employees
At 30 September 2005 the Group had 30,572 employees (2004: 43,383 employees, 2003: 44,507 employees). During the year the disposal of the Afrox Healthcare business resulted in the successful transfer of over 13,000 employees to the new owner. Employees of the company and its subsidiaries were located as follows:
Europe | 13,408 | |
Americas | 6,216 | |
Africa | 3,541 | |
Asia/Pacific | 7,407 | |
Unplanned employee turnover remains low and as a result, excluding disposals, the employee base remains stable. BOC invests time and energy in developing the potential of its people. Opportunities are reviewed and discussed with identified individuals to provide cross-line of business experience or to set up a range of functional and geographical assignments. This contributes to BOC's success in retaining and developing the core skills and capabilities it needs to meet its business, customer service and health and safety targets. BOC regularly reviews its succession planning processes and the availability of essential capabilities. Results show it has solid capability in most areas and adequate succession depth to meet both its technical and leadership requirements.
Employee satisfaction and commitment
Employee satisfaction is measured and managed both centrally and in the business units.
Levels of employee
satisfaction and commitment are generally high. A culture of accountability,
collaboration, transparency and stretch, known as ACTS, has been developed throughout
BOC. The ACTS principles provide a framework that employees can use in their dealings
with each other and with customers, suppliers and other stakeholders.
The Voice of BOC employee survey was conducted again in 2005. The survey, managed by an independent research company, is an opportunity for
BOCs people to rate the Groups performance on key issues affecting their employment. 68 per cent of employees responded to the survey. This high participation rate demonstrates employees willingness to contribute to BOCs
aim of being the employer of choice. The 2005 survey built on the employee perception
data collated in 2002 regarding ACTS, customer orientation, performance management
and diversity. It also incorporated new measures on safety and the Code of
Conduct. The areas where BOC employees deemed performance to be particularly high
or improved since 2002 were safety, management interest in employee well being,
the Code of Conduct, performance reviews, collaboration and diversity. The areas
deemed to need further improvement were customer focus, which is still a core
strength but slightly down on 2002, and employee engagement, which remained at
a high level but was lower than in 2002. As with previous surveys, business units
and enabling
functions are developing and implementing action plans to address the results
and progress will be reviewed on a regular basis.
Employment policies and Code of Conduct
The BOC Group takes its responsibilities as a global organisation seriously. It is committed to fostering a workplace that is safe and environmentally sound. It will always act in line
with all applicable laws, regulations and industry standards. It expects people to respect confidential information and company time and assets. It believes in open and honest communication, fair treatment and equal opportunities. It opposes public
corruption, anti-competitive behaviour and insider trading, and it supports the fundamental principles of good governance and human rights.
In 2003 BOC launched a global Code of Conduct, a set of legal and ethical standards that apply to all BOC employees and to contractors in their business
dealings with BOC. The code is available in ten languages. An extensive programme of communications and workshops has provided training for employees on the substance of the code. Annual sustainability plans embed the code within the businesses and
keep it visible, accessible and relevant to all employees. In 2004, a new network of code sustainability managers was formed to ensure that processes are in place to induct new employees, to provide refresher training and to consolidate
country-specific policies. The Code of Conduct telephone helpline has been extended to cover 49 countries and promotional material has been created to publicise the contact number in each country. BOC operates a strict policy of non-retaliation to
protect and encourage people wishing to share their concerns.
BOCs employee policies and procedures are aligned with the UN Universal Declaration of Human Rights. BOC is a signatory to the UN Global Compact, whose
ten principles - six of which relate to human rights and labour standards - are integrated into BOCs Code of Conduct. In many areas BOCs
existing standards exceed those set out in the Global Compact. In 2005, BOC reported
progress to the
Global Compact Office, according to official guidelines.
In
addition to the Code of Conduct, BOC provides guidance and human resources policies
to support BOC people in their day-to-day activities and long-term career planning.
These are aligned to the corporate values and principles. At the heart of this
approach
is the recognition that the energy and application of individuals and teams throughout
the organisation will determine which companies have
competitive advantage in todays complex global market. BOCs employment
policies are designed to underpin the Groups
operating requirements and growth strategies. The human resources units implementing
these policies are aligned to the business units in each geography and, as far
as practicable, Group policies are adapted to meet local requirements.
24 | The BOC Group plc Annual report and accounts 2005 | Employees |
Communication and involvement
BOC places a high priority on two-way communications with its people. The primary communication channels are within the business units, where local managers work with their people and
two-way communication is most achievable. The Group also uses a number of formal and informal communication channels to share information and to shape behaviour. In addition to traditional media such as videos, magazines, newsletters and briefing
packs, BOC has continued to invest in e-mail and web-based communications technologies to ensure that consistent and coherent messages are conveyed speedily to its people around the world.
The Group actively
searches for ways to involve employees in shaping the future. Teams meet to review
or jointly create processes, systems or strategies. A variety of employee structures
exist for these purposes, including peer groups, special interest groups, teams
of excellence and quality teams. Multi-disciplinary and cross-geographic groups
of employees regularly meet, either face-to-face, or by
using tele-, video- and web-based meeting technologies which have been installed
for these purposes.
Resourcing, training
and development
Resourcing, training
and development programmes are designed to ensure that the Group has a pool of
well-qualified, gifted individuals able to meet day-to-day operational needs
and plans for the future. BOC conducts a robust annual process to assess the
strengths and weaknesses of its units. It is committed to provide its people
with opportunities to develop and grow, but also to bring new blood into the
organisation through
targeted external recruitment. A global, web-based recruiting platform is in
place to supplement other recruitment channels.
BOC
continued to place great emphasis on personal and career development over the
past year. Employees are encouraged to be proactive about their future careers
and development opportunities. The aim is for all employees to have regular discussions
with their managers regarding their aspirations, prospects and development needs.
These
result in the formulation of an individual development plan, which
is an agreed course of action to meet employees needs as well as the needs
of the organisation. BOC offers many opportunities for career and personal development.
Employee development takes the form of on-the-job coaching and training, development
projects, secondments, e-learning, as well as more traditional classroom-based
training.
In
addition to the development that takes place to achieve current job effectiveness
of all employees, high potential employees are identified and developed with
future roles in mind. The Lead programme is an ambitious executive development
programme for high potential senior managers, facilitated by world class external
providers as well as senior BOC executives. It is customised for BOC and is
comprehensive in its scope. The programme offers a tailored curriculum and is
designed to equip the participants with the broad range of skills and experiences
they will need to be successful leaders within the Group. To date, some 150 senior
managers have participated in Lead programmes. A parallel leadership development
programme, iLead, has been developed for high potential middle managers and is
run regionally around the world. Lead and iLead augment many other management
development
initiatives, which are provided to all BOCs supervisors and managers. International
assignments are used to develop high potential executives and to create opportunities
within local management teams. The success of such programmes are reviewed regularly
with business unit heads as part of their performance contracts.
BOC
believes that how its employees work is as important as what they produce, which
is why it has concentrated on the behaviours associated with accountability,
collaboration, transparency and stretch the ACTS cultural principles.
Accountability comes through people knowing what they are accountable for and
being empowered
to deliver. Collaboration is about drawing on the rich diversity of styles,
talents and skills across the Group to maximise achievements. BOC values transparency
because it believes that visible problems can be solved and that informed people
make better decisions. Finally, stretch advocates continually
pushing the boundaries of performance. BOC has created a set of leadership competency
models, which are aligned to ACTS.
All recruitment,
development, recognition and enhancement processes are being aligned to this
comprehensive and unified BOC view of leadership and management.
Reward and recognition
An organisation that aspires to excellence must recognise and reward the achievement of excellence. The Group continues to refine the key value drivers of its business units and to ensure
it can reward and recognise outstanding individual and team performance in the fulfilment of business goals. Programmes to achieve this are cascaded throughout the organisation to heighten focus on effective performance at all levels.
The
Group continues to move towards a total reward system that allows people to structure
their remuneration and benefits to suit their individual needs.
Senior executives remuneration is linked to a Group-wide variable compensation
plan, which is described in the report on remuneration on page 73.
Employees | 25 | |
Retirement benefit plans
BOC
considers it important that its people provide for their retirement and fully
supports their efforts in this regard. Around the world, the Group provides opportunities
for people to participate in retirement programmes tailored to suit local conditions.
Just as importantly, the boards pensions committee takes prudent steps
to monitor and control Group-wide retirement benefit plans with local managers
being responsible for safeguarding the security of each retirement plan that
they sponsor.
The
financial position of the Groups main pension funds is detailed in note
8 to the financial statements.
Diversity
BOC believes that
diversity is a key driver of future organisational and operating effectiveness. As
one of the UKs few truly global companies, BOC highly values the rich diversity
of its people. While the Group consistently champions a set of unifying values
and principles, they are not imposed regardless of local sensibilities. Rather,
the Group strives to build on the qualities inherent in its global environment
by
encouraging people with different views, styles and approaches. Wherever in the
world it operates, BOC is committed to maintaining a workplace free from discrimination
for reasons of race, creed, culture, nationality, religion, gender, sexual orientation,
age or marital status. The success of its diversity programme is monitored and
reported regularly.
Disability is not considered a barrier to employment and, as far as local conditions allow, employees are selected on the basis of their ability to perform
the job. Further necessary training is arranged, taking account of their particular needs and the resources required to meet them.
Employee share schemes
Many BOC employees
in the UK and some other countries have built up an equity interest in the Groups
business through employee share schemes. Options may be granted at a discount
to the market price at the date of grant. The term of options granted could be
from three to seven years and any option is conditional on a commitment by the
individual to make regular savings from pay that are then held by an independent
organisation
to purchase shares at the end of the option period. The exercise of options under
these schemes can be satisfied by the issue of new shares or the transfer of
existing shares.
26 | The BOC Group plc Annual report and accounts 2005 |
Social, environmental and ethical performance | |
Exercising sound corporate responsibility is fundamental to the way BOC operates. The Group aims always to behave ethically and to manage risk strategically. It has a process for
identifying, evaluating and managing all risks in accordance with best practice.
This
section outlines the Groups systems for managing its social, environmental
and ethical (SEE) risks and opportunities - in line with guidelines set out
by the Global Reporting Initiative, the Association of British Insurers, the
UKs Combined Code on Corporate Governance and the provisions of the US
Sarbanes-Oxley Act 2002 as it applies to foreign private issuers. More details
about
BOCs risks and corporate responsibility performance can be found in the
sections on risk factors on pages 38 and 39 and on the companys
website, boc.com.
The
Group works actively with its stakeholders - shareholders, customers, suppliers,
employees, local communities and governments. Underlining the
Groups adherence to best practice, BOC engages with a wide variety of employee,
safety, environmental and community bodies.
BOC
is a signatory to the UN Global Compact. All Global Compact principles are integrated
into BOCs Code of Conduct and, in many areas, BOCs
existing standards exceed those set out in the Global Compact. In 2005, BOC submitted its communication on progress to the Global Compact Office, according to official guidelines. BOC continues to review and adapt its business practices to achieve
the Groups SEE objectives and activities.
Executive responsibility
BOC has an integrated
approach to SEE risks, managing them in the same way as all other business considerations
through business unit and Group risk management programmes. These processes are
applied to major business decisions such as acquisitions, disposals, new ventures
and major supplier contracts. BOCs business dealings are guided by a global Code of Conduct. The code sets out the safety, environmental, social, legal and
ethical parameters that Group businesses and employees are expected to follow. The code is the responsibility of the executive management board (EMB), whilst BOCs
businesses are responsible for day-to-day implementation.
EMB
members are responsible for each of the codes standards, supported by the
appropriate business and functional structures. The Group chief executive has
ultimate responsibility for the code programme. He delegates oversight to an
EMB sponsor board and day-to-day management to a code advisory group. The code
advisory group is chaired by the general counsel, global compliance.
Safety,
health and environmental management systems are the responsibility of the Group
chief executive and are implemented by business managers, supported by the Group
director for safety, health, environment and quality (SHEQ). Workplace issues,
including labour relations, diversity, equal opportunities and human rights,
are managed by the Group director, human resources (HR). Market issues, including
customer relations and ethical trading practices, are managed by the line of
business chief executives. The director of supply management oversees BOCs
supply chain and ethical purchasing policy and reports to the Group chief executive. The
Group director, corporate relations, manages community relations, including sponsorships
and charitable support.
The
EMB regularly reviews Group systems for managing risks and opportunities, including
business assurance audits, legal, SHEQ and HR reviews, appropriate training and
communications, and performance management and remuneration incentives through
the Groups performance contract process. Directors are provided with appropriate SEE training and communications. For example, they are given regular
safety briefings and Code of Conduct progress reviews. Training on defensive driving and other SHEQ priorities is provided. The EMB sets a strategic direction with regard to all business issues, including SEE matters. Business units implement and
develop the EMBs strategy through their own management teams.
Safety and other SEE measures, as required, are included in performance contracts. Part of the remuneration of business unit managers and their teams is
dependent on achieving these measures.
The Code of Conduct
Launched two years
ago, the Code of Conduct embodies BOCs commitment to integrity and responsible
business practice. This year, steps were taken to reinforce the effectiveness
of the
code and to build it into the way that BOC does business.
The code advisory group met twice during the year. The role of the group is to establish globally consistent ethical and legal standards, to support the
business in owning and upholding these standards and to respond to issues that may require BOC to adopt a new or revised position within the Code. Chaired by the general counsel, global compliance, the council comprises representatives from each
line of business and Gist.
A robust central tracking system was introduced to capture allegations from all the businesses and channel them to the global compliance function. The system
not only records allegations that are subsequently substantiated, but also allegations that ultimately prove unfounded but that warranted further investigation.
BOCs
network of sustainability managers is responsible for championing the Code within
the businesses. Guidelines on communications and training were issued and each
business unit head is required to report on progress within the quarterly performance
contract review.
The
Code, available in ten different languages, can be accessed via boc.com, the
intranet, CD or paper copy. It is linked to a number of other systems, notably
the Groups integrated management systems and standards (IMSS). BOC operates
a confidential 24 hours a day/seven days a week helpline in 49 countries, supported
by helpline promotional material in the form of posters, wallet cards and a screensaver.
In 2005, the Group introduced a quarterly Code report, distributed to senior
management for onward cascade to all employees, giving a round up of news, recent
violations, statistics and lessons relating to the Code.
Code sustainability issues are reported to the EMB and appropriate managers on a monthly basis. In 2005, the helpline received 155 allegation cases from
around the world. 19 per cent resulted in disciplinary action and 57 per cent were found to be unsubstantiated or non-violations. The remaining cases are still being investigated.
Social, environmental and ethical performance | 27 | |
BOCs
global management system (IMSS)
IMSS
(integrated management systems and standards) is a system developed by
BOC. It has three distinct parts: the IMSS Library, Traccess and Audit
Manager. The IMSS Library houses
electronic copies of BOCs reference material, work instructions, operating
procedures and management systems and standards. Traccess is BOCs
online training and competency tracking system, storing individual learning
profiles and employee training histories. Audit Manager houses all stages of
the audit
cycle and verifies site performance and compliance against best practice and
minimum standards defined in the IMSS Library. IMSS documents Group knowledge
from high level policies to
detailed work instructions, enabling all employees to be trained and assessed
in the skills required by their roles. IMSS outlines the correct protocols
and minimum standards, and tracks the performance of actions needed to ensure
the
safe, environmentally sound and efficient management of BOC businesses worldwide.
IMSS and the Code of Conduct are mutually supportive.
Stakeholders
BOCs Code of Conduct is segmented into key stakeholder groups, each of which is addressed by specific code standards and management structures and procedures. Details are posted
under the corporate responsibility section of boc.com. For example, BOC works with its suppliers through a supplier evaluation, selection and performance appraisal (SESPA) system, which assures minimum standards of supplier performance, quality
assurance and legal, ethical, social and environmental compliance. BOCs ethical purchasing policy, an integral part of SESPA, is managed by the Group supply management function, underpinned by the Code of Conduct and supported by IMSS and a
number of other web-based platforms. Suppliers are segmented according to a combination of two matrices: supplier risk profile and product risk profile. The highest risk category requires the ethical purchasing policy to be included in the
suppliers signed contract with BOC, with BOC reserving the right to terminate
the contract in the event of a breach. Any employee can raise concerns about supplier
ethics via the Code of Conduct helpline and data is captured and reported as
a
specific category.
Identifying and prioritising SEE risks
In 2004 BOC introduced a formal process to identify and manage its SEE risks and to identify potential opportunities. EMB directors, business unit heads and other key managers around the
world submitted potential SEE risks which were consolidated by the Group risk management function and rated using predetermined scoring criteria. Each risk was rated according to its potential impact, the adequacy of plans to mitigate the risk, and
its urgency.
The broad areas identified by the SEE risk and mitigation process are: managing the safety of people associated with BOC; managing major operational hazards;
minimisation of greenhouse gas emissions; energy efficiency; water conservation; global adherence to and the effective working of the Code of Conduct; managing an ethical supply chain; and continuing enhancement of product stewardship
procedures.
The
Groups SEE review found that management systems and mitigations already
exist for identified risks, but in some minor instances enhanced measures have
been, or are being, put in place. One example is a screening process to ensure
that customers have the capability to handle hazardous products safely. Piloted
this year in the UK for the packaged chemicals business, the process will be
rolled
out to the wider Industrial and Special Products business in 2006.
Corporate social investment strategy
BOC strives to be a good corporate citizen by: operating safely and minimising the environmental impact of its activities; enhancing the wellbeing of local economies through employment on
the bases of diversity, equal opportunity and merit, and; fostering strong community relations.
BOC is committed to all the communities in which it operates, wherever they are in the world, and its contribution takes on a number of forms. At the Group
level BOC supports a variety of programmes broadly aligned with the nature of the business. Key themes are the environment, education, medical research and the arts.
At the local level BOC encourages a range of volunteering, donation and sponsorship programmes, guided from the centre but ultimately decided and implemented
at country, business unit and site levels. The choice of charitable donations is devolved through matched giving schemes.
Managing corporate responsibility performance
This year the Group
continued to participate in the UKs Business in the Community (BiTC) corporate responsibility (CR) index. The index assesses companies performance against a
wide range of environmental, social and ethical measures. BOC has participated in the indexs sister survey, the Business in the Environment (BiE) index, since 1995. BOC scored 89 per cent in BiTCs CR index, ranking it 39th out of 144
participating companies, including 57 from the FTSE100. The average score among participants from BOCs comparator group was 88 per cent. Completing the index demonstrates the Groups commitment to managing, measuring and reporting its
corporate responsibility performance in an open and transparent way. BOCs completed survey and BiTCs independent assessment of the Groups performance are published on boc.com. The BiTC index is the Groups
common measure and
standard response to corporate responsibility and SEE enquiries.
28 | The BOC Group plc Annual report and accounts 2005 | Social, environmental and ethical performance |
Safety,health
and the environment
There are no
greater priorities for BOC than the health and safety of our employees, contractors,
suppliers, customers and local communities, and the protection of the environment.
BOC is committed to excellence in managing these areas through normal business
practice assisted by its safety, health, environment and quality (SHEQ) function.
SHEQ
policies and procedures are the responsibility of the Group chief executive
and are implemented by BOCs businesses with the support of the SHEQ
function. The SHEQ department works within the businesses to ensure that the
Group has a deliverable policy, is active in its risk management and professional
in its mitigation.
BOC
has well-established programmes to drive improvement in SHEQ performance.
Employees are required to comply with all external regulations and the Groups
policies and Code of Conduct. Suppliers are expected to meet minimum standards
set by BOCs ethical purchasing policy.
SHEQ
management standards, procedures and tools are embedded in Group practice
by the organisations integrated management systems and standards (see
IMSS section above). IMSS outlines the standards and actions needed to align
with, or conform to, internationally accredited certifications such as ISO
9000 (quality assurance), ISO 14001 (environment) and ISO 18001 (health and
safety).
BOC met its objectives in 2005 when the Group: | |
• | Retained safety, health and environment as the top priority at EMB level; |
• | Retained SHEQ at the forefront of Group and business unit employee communications; |
• | Sustained emphasis on behavioural safety through the Safety in BOC programme; |
• | Improved safety and environmental performance against 2004 figures; |
• | Transitioned to using proactive measures (leading indicators), in addition to the traditionally reported lagging indicators, to measure SHEQ performance; |
• | Took positive measures to improve road transport safety; |
• | Continued to conduct its annual environment survey to highlight opportunities for continuous improvement; |
• | Set initial environmental targets for 2006 and beyond. |
Along with the Code of Conduct and the Groups ACTS operating principles, the Safety in BOC programme ensures that SHEQ issues are managed consistently across all countries and businesses, in accordance with our SHEQ policies and principles.
Overall safety performance
2004 | 2005 | ||
Lost workday case rate | 0.41 | 0.37 | |
Total recordable case rate | 1.18 | 1.09 | |
Passenger car avoidable accident rate | 2.12 | 1.81 | |
Truck avoidable accident rate | 2.38 | 2.20 | |
Safety
Safety is BOCs highest priority and the Group has one simple goal: zero incidents and injuries. Safety is the first agenda item at every EMB and business executive meeting. Great
emphasis is put on providing all our employees with the necessary training, equipment and safeguards such that no-one gets hurt. Business managers around the world, with SHEQ support, continually strive to improve safety performance and, through our
Safety in BOC programme, are now focusing on individuals behaviour and
the effect that safe and unsafe behaviour has on the organisation.
Each
business unit has a SHEQ function, reporting to the business units executive
and the Group SHEQ function through a global peer group. This ensures that global
best practice and the functional requirements of the business and Group are always
at the forefront of management thinking.
BOC manufactures and distributes products that are potentially hazardous, some being stored at very low temperature or under pressure, and some having toxic
or flammable properties. Consequently, the Group is committed to reducing the risk of harm to people through its products. Operating safely and communicating safe working practices are an integral part of its safety and product stewardship
processes.
It is important
for the Group not only to have clear and measurable performance standards practised
by all BOC employees, plants, depots and distributors, but also to disseminate
these safe working practices to our customers and suppliers. IMSS contains product
safety and stewardship instructions, policies and procedures. Each product line
has specific standards attached to it. BOC undertakes research
into the health and safety of its products, keeps abreast of new scientific information
and works with industry and public bodies to reduce risk and share learning.
This year BOC launched an online safety advice service, bocsafety.net, to help
customers identify risks and unsafe practices and adopt guidance on best practice
to comply with the law.
BOC
continuously strives to improve safety in the workplace and combat the root causes
of safety incidents. In 2005 BOC Edwards, which manufactures hazardous gases
for use in processing semiconductors, was recognised for its safety performance.
In South Africa, BOC Edwards received two NOSA safety awards for occupational
risk management procedures at the nitrogen trifluoride plant in Pelindaba. In
the
US, BOC Edwards special gases plant at Medford, Oregon, was awarded the OSHA Voluntary Protection ProgramsStar Program status for self-sufficiency in their ability to control workplace hazards. EMC, BOCs US-based water
management business, won several Water Environment Association awards. EMCs water treatment plant at Ligonier, Indiana, won the prestigious Water Environment Federations
Burke Award.
Regrettably,
three Group employees died in work related activities in 2005. Two employees tragically
died in road incidents, one in the UK and one in the US, both of which involved
third parties. These incidents reinforce our commitment to remain focused on
transport safety during 2006. Another employee was killed in Taiwan, by falling
from a height at a customer location. In addition, BOC experienced six
contractor fatalities during the period.
The Group chief executive, SHEQ director and business unit managers review every fatality and major incident personally. Investigations are only closed when
the chief executive is fully satisfied that the root causes of the incident are understood and action has been taken to prevent future recurrences.
Social, environmental and ethical performance | 29 | ||||
1. | 2003, 2004 and 2005 safety statistics include mergers, acquisitions and all joint ventures. Previous years have not been restated. |
Controlling process-related risks is of the utmost importance. Any incidents that do occur are thoroughly investigated and the lessons learned are applied
throughout the organisation to minimise the likelihood of recurrence. Safety lessons are shared throughout the gases industry and BOC continues to participate fully in the development and application of industry-wide
codes. This year the Group built on the vision, policy and strategy put in place last year when it launched its Safety in BOC programme. Safety in BOC, which complements and builds upon existing safety systems, standards and tools, aims to prevent people getting hurt by effecting lasting behavioural and cultural change. It is underpinned by the principle that safety is not a small part of someones job, it is 100 per cent of our behaviour, 100 per cent of the time. The aim is to establish a culture whereby each employee thinks instinctively not just about his own safety, but also about the safety of others, be they colleagues, contractors or members of the community. The roadmap is the key tool that supports Safety in BOC. It shows the organisation where it is and how it can move from its current base to world class through a series of well-defined steps and markers. It is a gap analysis tool that enables a particular department, site or business to assess itself in terms of safety performance, plot year by year progress on each of the nineteen roadmap components and develop a plan to progress to world class. During 2005, the roadmap has been formally integrated into safety implementation plans within each of the businesses, which are in turn included in business planning processes and individual performance contracts. The focus on leading indicators continued in 2005, allowing the Group to monitor safety performance in terms of proactive measures being taken as well as lagging indicators measuring past performance. In conjunction with the roadmap, a series of practical steps were taken during 2005 to help embed safe behaviour and the desired safety culture. BOCs business units in Asia and Africa rolled out SiteSafe, a focused approach for implementing the systems, standards and behaviours inherent in Safety in BOC. SiteSafe included various modules such as LeadSafe workshops to promote visible leadership among management and ActSafe, a series of safety through empowerment seminars encouraging supervisors and front line employees to recognise unsafe acts and challenge them through peer-to-peer conversations. During 2006 other business units will use SiteSafe to cascade and further embed the Safety in BOC principles into the organisation. At a local level, every BOC business unit throughout the world actively engaged employees through sustained communications, cascade briefings and training programmes. Approximately half the major incidents across the Group result from road transport, which is also the main cause of fatalities. Driver training has always been a high priority at BOC, both for commercial vehicles and passenger cars. Initiatives include defensive driver training, driver observation and feedback, vehicle design, use of on-board monitoring technology and anti-rollover and jack-knife training. Last year, the Group appointed a director of Group transport safety to collaborate with regional counterparts and develop a consistent global strategy for improving road safety throughout BOC. In 2005, this appointment has started to deliver new processes and tools to share best operating practice and achieve sustainable improvements in road transport safety. For example, a new transport audit protocol was piloted in Asia and a new driver-training model will be ready for implementation in the first quarter of 2006. A common vehicle incident reporting process was established to aid learning, while a global transport team of experts met twice in 2005 to prioritise initiatives to prevent fatalities or serious injuries. Building on the Groups total ban on making and receiving calls from mobile phones while driving, a major campaign was launched to promote transport safety and reinforce the wearing of seatbelts. This campaign was supported by a global transport directive to apply a minimum set of safety standards to all fleet and contractor vehicles throughout the Group, including a requirement to fit three-point seat belts rather than lap belts where the latter existed. At Gist, safety rails were introduced for the protection of drivers when coupling tractors to trailers and stability systems were installed on all high-sided double-decker trailers to reduce the risk of rollover. In addition to the leading indicators previously mentioned, used to monitor safety performance proactively, the Group also has four reactive, or lagging, indicators to provide a consistent measure of its workplace and vehicle safety performance. These are: |
|
| lost workday case rate (LWCR) per 200,000 hours. This includes all accidents resulting in the loss of one complete day of work, according to best international practice. Many companies only report cases resulting in three or more lost workdays as deemed reportable under RIDDOR regulations; |
| total recordable case rate (TRCR) per 200,000 hours. This includes all LWCRs and medical treatment cases; |
| passenger car avoidable accident rate (PCAAR) per million miles; |
| truck avoidable accident rate (TAAR) per million miles. |
The figures for 2005, which include joint ventures and acquisitions, showed an improvement across all four lagging indicators. The disposal of Afrox Healthcare in 2005 marked a major change in BOCs portfolio, as the business employed over 13,000 people representing around 30 per cent of the total workforce. BOCs lagging indicators are shown with and without Afrox Healthcare, giving a basis for future comparison. The chart excluding Afrox Healthcare gives a clearer indication of underlying improvement, with a 20 per cent improvement in both lost workday and total recordable case rates since the launch of the Safety in BOC programme two years ago. | |
30 | The BOC Group plc Annual report and accounts 2005 | Social, environmental and ethical performance | |
Occupational health and hygiene | |
BOC
requires its businesses to manage employee health activities in accordance
with local laws and regulations and according to BOCs codes of
practice, standards and procedures. The Groups occupational health
and hygiene (OH) function
provides a global service striving to eradicate work-related health
hazards and to ensure that employees can come to work and carry out
their duties safely. Employees have access to guidance on OH from health professionals and qualified safety, health, environment and quality (SHEQ) managers. This is supported by a range of up-to-date training programmes, manuals, videos and safety data sheets, which are available through local and global SHEQ functions and on dedicated SHEQ intranet sites. The OH function carries out reviews in all business units to provide information and guidance on the main health issues that exist in BOC operations globally and how best these potential hazards may be minimised or eliminated. This is achieved by providing best practice standards and guidance to local SHEQ personnel who then implement these standards and policies as necessary. Adverse employee health effects are monitored through local occupational health checks around the world. Some are internal and others are outsourced to professional OH providers. In some regions,Well-person health checks are available for employees and specific tests are done for employees engaged in hazardous activities. These vary according to risk and requirements. The main potential health issues that exist in BOC operations differ across business units. When dealing with our gases businesses, the main potential health issues are: |
|
| exposure to noise from gas compression activities and from cylinder handling; |
| potential exposure to some gases filled into cylinders; |
| potential exposure to chemicals used in metal cleaning and painting operations; |
| ergonomic and manual handling risks. |
As reported last year, the OH programmes developed to deal with these issues continue to be applied across the Group. Other continued work has been the
ongoing programme to reduce some of the hazardous solvents used for metal cleaning and possible substitution of those used in paints with safer and more environmentally friendly alternatives. Of particular significance this year is the high percentage of lost workday and medical treatment cases as a direct result of manual handling, culminating in short-term acute injury and chronic conditions such as back, hand, arm or shoulder conditions. In the Industrial and Special Products business, attention to these activities is a high priority with major effort being applied to risk assessment processes and the implementation of best practice solutions to minimise identified risks. The principle of best practice has also been applied to new plants, such as the new cylinder filling facility in Bangalore, India, which was designed to minimise manual handling of cylinders as much as possible and hence reduce the potential risk of injury among employees. Work has also been done to gather and analyse information relating to employee health issues, with a view to counteracting the costs of ill health and enabling actions to be established in the priority areas. There is also recognition that even if ill health is not related to the job, there can still be a benefit to the employee and the business in facilitating early recovery and return to work. In the south Pacific region, a scheme has been devised to speed up the diagnosis and treatment of employees suffering from injury or ill health, therefore bringing rehabilitation forward. This process, coupled with pro-active preventative programmes, has the added benefit of reducing employee liability insurance costs, in real terms, such that they are significantly less than industry benchmarks. The principles of this injury management scheme are being examined with a view to globalisation. |
|
The environment | |
BOC is classified as part of the chemicals sector, but does not have the same direct or significant environmental issues to deal with as traditional chemicals manufacturers. The nature of BOCs activities and the type of chemicals handled are quite different. However, in line with other industries, BOC is committed to sound environmental practices including the conscientious stewardship of its products and services. | |
Across the businesses, BOCs most significant environmental impacts fall into four main areas. These are: |
| Energy consumption: Process Gas Solutions is a major consumer of electricity, used to power air separation units.The generation of electricity directly contributes to carbon dioxide emissions. |
| Vehicle transport: BOCs gases businesses operate large fleets of vehicles worldwide for delivering gas to customer sites, contributing principally to carbon dioxide emissions. Gist operates a logistics network in Europe. |
| Ozone depleting potential (ODP) substance release: cryogenic air separation techniques require air to be cooled to achieve liquefaction. This requires refrigeration, which has traditionally used refrigerant gases that have ozone depleting potential. |
| Non-hazardous and hazardous waste: this covers a range of categories and varies across business units. For example, one of the main forms of waste from Process Gas Solutions is oil used in compressors. In Industrial and Special Products, waste comprises packaging materials, metals, acids and alkalines used for abatement purposes in the production of special gases, solvents from painting cylinders and waste related to transport such as oil and batteries from vehicles. BOC Edwards hazardous waste includes chemicals used in component cleaning and toxic residue from vacuum components replaced during servicing. In Gist, the main waste is packaging materials such as paper, card and plastics. |
Social, environmental and ethical performance | 31 | ||||
The Group continues to work actively with its stakeholders to ensure that environmental issues are approached responsibly. BOC is a signatory to the UN Global Compact and abides by its
environment principles. In the US and Australia BOC supports the chemical industrys Responsible Care programme. BOC participates in Business in the Communitys Environment Index and this year scored 88.86 per cent, ranking it 48th out of
168 participating companies and number one in the chemicals sector.
BOC aims to comply fully with all material environmental laws and regulations. No prosecutions for breaches of environmental regulations were incurred in
2005.
Management of environmental issues that are relevant to the Groups businesses is overseen by the safety, health, environment and quality (SHEQ)
department and implemented through a worldwide environmental management system. This includes operating instructions, training, performance tracking and auditing. The sharing of best practice is achieved through the Groups integrated management
systems and standards (IMSS).
BOC
has operated a comprehensive environmental survey of its sites for more than
ten years. The annual web-based survey, which covers approximately 550 sites
around the world, highlights issues relevant to the businesses and identifies
opportunities for the development and sharing of best environmental practice. The
results are reviewed by the executive management board, business unit management
teams and
the Group SHEQ director. Annual environment action plans are integrated into
business unit management processes and included in business and individual performance
contracts.
Many
BOC business units have programmes to achieve ISO 14001 environmental certification.
Our welding product consumables business in Germiston, South Africa, and our
special gases site at Morden, UK, both achieved ISO 14001 certification this
year. Thirty key industrial sites around the world are now accredited. However,
all BOC sites operate in accordance with ISO standards even if not
specifically accredited, because IMSS, containing the Groups global operating
systems and standards, is aligned to ISO 14001.
Selecting
the right supplier for BOC is fundamental to conducting business effectively
and ethically. Throughout its businesses, BOC has adopted its proprietary supplier
evaluation, selection and performance appraisal (SESPA) process, together with
an ethical purchasing policy stating that suppliers must place a high regard
on safety and adhere to local legislation concerning pollution.
This year BOC appointed a manager to identify, develop, share and support the implementation of environmental best practice. The benefits will include
improvements in cost-efficiency and productivity, as well as a reduction in emissions, waste and water consumption.
It is now widely recognised that carbon dioxide (CO2), released into the atmosphere by burning fossil fuels for heat and power, is the main greenhouse gas that has an impact on climate change. BOCs climate impact comes from intensive use in air
separation units (ASUs) of electric power, which is still generated largely from coal-based technologies. Improving energy efficiency is a high priority at BOC. Reductions in energy consumption benefit everyone in terms of lower CO2 emissions, lower production and purchase costs and lower product prices.
BOC manages the purchase and use of power extremely carefully. Its ASUs are run at optimal efficiency levels required to meet regulatory and competitive
requirements. Long-established efficiency programmes anticipate power price movements wherever possible. To assure the highest levels of efficiency, state-of-the-art operating centres in each global region control BOCs production plants. Over
the last four years, for example, Process Gas Solutions has undertaken more than one thousand plant and distribution efficiency projects, delivering significant annual savings. Managing climate change issues effectively and responsibly is a matter
of business and environmental necessity for the Group.
Carbon dioxide equivalent emissions from BOC production plants this year are estimated to be 7.9 million tonnes (2004: 7.5 million tonnes); 7.4 million
tonnes relate to emissions from using electricity and 480,000 tonnes as a by-product of producing hydrogen by steam methane reforming. The hydrogen-related emissions are reported for the first time this year. BOCs electricity consumption for
its production plants was approximately 11.9 Terawatt hours (2004: 11.8 Terawatt hours). The two gases businesses, Process Gas Solutions and Industrial and Special Products, account for 99 per cent of these emissions and in 2005 they produced 2,442
tonnes (2004: 2,521 tonnes(1)) of carbon dioxide equivalents from electricity usage for each
£1 million of turnover.
BOCs methodology for emission estimation and addressing emission factors(2)
has been independently assessed and confirmed to be appropriate. The Group uses energy data to help improve its energy efficiency with resultant improvements in carbon dioxide
emissions.
During
2005 BOC undertook a number of pilot projects, with the assistance of the Carbon
Trust, to improve energy efficiency at several UK sites. For example at BOC
Edwards Burgess Hill manufacturing facility a site energy assessment identified
potentially 340 tonnes of CO2 equivalent savings and at ISPs
Worsley site a similar survey identified 420 tonnes of CO2 savings. These results will
be used to develop best practice in energy management next year.
1. | Adjusted for the US packaged gas business divested in 2004. |
2. | The methodology is consistent with all major mobile and point sources of carbon dioxide emissions within scope 1 of the Greenhouse Gas Protocol (World Business Council for Sustainable Development and the World Resources Institute, March 2004), all major sources of carbon dioxide emissions under scope 2 of the protocol and major mobile sources of emissions under scope 3 of the protocol. The figure does not include non-carbon dioxide global warming gases (N2O, SF6, CH4, PFCs and HFCs) or minor sources such as business travel, office electricity at small sites and decomposition of wastes and carbon dioxide emissions associated with heat and/or steam imported to BOC plants. |
32 | The BOC Group plc Annual report and accounts 2005 | Social, environmental and ethical performance |
Ozone depleting potential (ODP) substance release has decreased this year by 38 per cent. In 2004, two plants were responsible for 60 per cent of total ODP substance release and in 2005
actions were taken to remedy the situation at these plants. For other plants annual refrigerant consumption and loss targets were set. In Process Gas Solutions a project was undertaken to reduce ODP substance release from the refrigeration system at
a nitrogen liquefaction unit. Cleaning technology developed by Hudson Technologies resulted in a significant reduction in ODP substance loss and the saving of 3,000 tonnes per year CO2 equivalent.
BOCs Industrial and Special Products business supplies a range of refrigerant gases and is phasing out those with ozone depleting potential, according
to the requirements of the Montreal protocol. BOC Edwards supplies special gases for the semiconductor manufacturing process, which can result in ozone depleting emissions at the end of the process. BOC Edwards has developed a wide range of
abatement systems for rendering these emissions harmless. One example is the Zenith Etch Plasma, an integrated vacuum pump and abatement system. The product assists in achieving the World Semiconductor Councils target for perfluorocarbon (PFC)
emissions and is closely aligned to the energy reduction philosophy of the International Technology Roadmap for Semiconductors (ITRS). It delivers high performance PFC destruction with total power consumption of less than 10 kW, less than a quarter
that of conventional systems performing the same function, making it the most energy efficient system of its kind on the market.
Hazardous waste and general waste performance improved in 2005 as a result of site based programmes focused on waste minimisation.
The transport of product by road also has a potentially significant environmental impact. BOC operates its vehicle fleet to the highest environmental
standards. Emissions of carbon dioxide equivalents from our transport operations are approximately 552,000 tonnes of carbon dioxide equivalents(3).
Process
Gas Solutions has put in place a global reporting card and network to focus on
transport efficiency and delivery for its tanker distribution network. The tool
analyses vehicle utilisation metrics and delivery statistics. Reports highlight
trends and thus help improve transport efficiency, reduce mileage, and thereby
reduce emissions. BOC Edwards has also been working on a supply chain
management project to replace air freight with sea freight through improved planning
of inventory and supply needs.
BOCs distribution services business, Gist, undertook an efficiency programme in support of key customer Marks & Spencers transport strategy.
By synchronising volume more closely to store needs and implementing a new planning process, efficiency was improved by 11 per cent and delivery schedules reduced by 2.8 million miles. Gist and Marks & Spencer, working together, also introduced
command steer trailers, drawbar Simply Foods vehicles and double decker trailers to reduce trips and therefore mileage. Road speed was limited to 53 mph to save fuel and automated gearboxes were fitted to the transport fleet, resulting in an
estimated average saving of 0.3 mpg per vehicle. In addition,quiet packs were fitted to a number of fridge trailers to reduce noise emissions at stores.
In the past three years much work has been done to improve environmental performance and to establish the business processes and metrics that will permit the
publishing of pre-set performance targets. Every BOC business has internal efficiency targets that have environmental benefits. Some relate to structural changes in the businesses which, when in place, will improve the monitoring of performance
patterns and enable the development of longer-term targets.
Process Gas Solutions, which manages the Groups air separation units and thus accounts for the majority of energy usage, will:
• | Implement 59 power saving projects in 2006, which will reduce electricity usage by 83,000 MWh, saving the equivalent of 54,000 tonnes of carbon dioxide emissions. |
• | Reduce the release of ozone depleting potential materials by at least 40 per cent by 2009. |
Industrial and Special Products, which has BOCs largest distribution fleet worldwide, will: | |
• | Establish single customer delivery vehicle scheduling centres in the UK, South Africa and south Pacific in 2006 from a current total of 22 scheduling centres. Centralised scheduling will lead to improvements in the efficiency of the fleet. As part of the programme, cab computers will be installed to give real time feedback on scheduling and the automatic capture of key performance data, such as kilometres driven for each cylinder delivered and litres of fuel consumed for each 100 kilometres driven. |
• | Review vehicle replacement policy and commit funds in 2006 to replace old vehicles across all business units. For instance, the average vehicle age in South Africa has fallen from 9.4 years in 2003 to 6.8 years currently. The target is an average age of 6 years. |
BOC will continue setting internal targets through business unit performance contracts at site level where individual improvement opportunities have been highlighted by audits, the annual environmental survey and identification of best practice. These targets include opportunities to reduce waste, conserve water and improve process efficiency.
3. | First year of reporting. |
Social, environmental and ethical performance | 33 | |
Product stewardship programmes minimise the environmental impact arising from the manufacture of BOCs products and their ensuing use by customers. Growing concern about the environment and climate change has led to increased legislation, which presents BOC with potential business opportunities, such as:
• | BOC has formed a partnership with the Morgan Motor Company to develop LIFECar, the worlds first hydrogen powered sports car. The hydrogen fuel cell produces electric energy, powering four separate electric motors, one at each wheel. The only waste product is water. |
• | BOC has signed a ten-year agreement with Biofuels Corporation in the UK to supply nitrogen and compressed air used in the production of environmentally friendly biodiesel. |
• | BOC and Dabbrook Services have combined solar power and hydrogen fuel cell technologies to develop an eco-friendly water management system for the Environment Agency in the UK. |
• | BOC has signed several contracts in the US to supply oil refineries with hydrogen for producing cleaner fuels. Hydrotreating meets the US Environment Agencys requirements for lower-sulphur gasoline and diesel fuels. |
• | BOC and Cellex Power Products, Canada, are jointly developing hydrogen supply solutions to power forklift trucks used in large distribution warehouses in north America. |
• | BOC and the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO) have developed an environmentally safe fumigant to replace methyl bromide in the treatment of soil, pests, weeds and crop diseases. |
• | BOC is helping to cut the rate of ozone depleting emissions across the building sector with the introduction Ecomate®, an environmentally friendly foam blowing agent. |
Commitment to the environment
The
UK-based BOC Foundation for the Environment, established with an initial injection
of £1 million in 1990, continues to fund air and water quality projects. New and ongoing
projects include: a review of roadside emissions testing; development of liquid petroleum gas clean fuel
cell technology; a new oxidation technique for pharmaceutical toxic waste; an
evaluation of photovoltaics for solar power; research into the impact of electrical
and electronic hazardous waste; and a programme to develop low cost electrolysers
in support of the hydrogen economy.
This year, the Group contributed £385,000 to the Foundation and approved new awards totalling £674,000, bringing the total combined funding to
date from BOC and its co-sponsoring partners to £15 million.
BOC joined forces with the North East Process Industry Cluster (NEPIC) to launch an environment award for schools in the north east of England. Pupils are
invited to submit practical ideas on environmental issues ranging from recycling to preservation of air and water resources.
In other parts of the world, notable contributions were made to environmental initiatives in New Zealand and Australia. BOCs Where Theres
Water community environment grants programme in New Zealand, which has awarded 45 grants throughout the country since its inception three years ago, awarded £13,000 in grants, mainly to schools undertaking water conservation projects. In
Australia, BOC donated ten hectares of land at its Wagga Wagga operations centre to Greenfleet, a non-profit organisation that reduces the environmental impact of carbon dioxide emissions by planting trees. BOC volunteers helped local schoolchildren
to plant ten thousand trees on the site.
Commitment to education
BOC continues to support educational programmes in local communities through school tours, lessons in the properties of gases, health and safety briefings, careers advice, technical
support and academic research.
BOCs
Inspiring Gases education programme made further progress in terms of educational
posters and CDs, in addition to development of the web site at boc.com/education.
The
programme, designed to complement the school chemistry syllabus and to stimulate
young peoples interest in science, is being run in co-operation with the
Royal Society of Chemistry. This year, BOCs UK-wide network of
science ambassadors staged a spectacular new show called Its a Gas.
Staged at the Glasgow Science Centre to coincide with the 7th Institution of
Chemical Engineers World Congress, the show demonstrated the properties and
applications of gases with plenty of flashes, bangs and vapour clouds to appeal
to young audiences. Its run was extended to the end of the school summer holidays
because of its popularity.
Other
educational activities in the UK included the BOC Gases Challenge, designed to
encourage secondary school students to develop chemical engineering ideas and
won in its 24th year by a team of pupils from Royal Russell School in Croydon.
For the fifth year, B OC sponsored the Science, Engineering and Technology Student
of the Year Awards, held at the Guildhall in London. The winner, a chemical
engineering graduate undertaking a PhD, received £500 and £500 was
also donated to Loughborough University for his work on the engineering of artificial
blood for transfusions. BOC supports a range of education bodies and initiatives
including: The Council for Industry and Higher Education; The Salters Festival
of Chemistry; The Institute of Chemical Engineers environment award; Surrey County
Councils young entrepreneur scheme; Surrey Scholars Club; the Industrial
Trusts Open Industry programme: SETPOINT and Surrey SATRO.
34 | The BOC Group plc Annual report and accounts 2005 | Social, environmental and ethical performance |
Commitment to medical research
BOC
made an annual grant of £10,000 to the Association of Respiratory Nurse
Specialists to aid the fight against chronic respiratory diseases in the UK.
As part of its commitment to the NHS and the medical establishment as a whole,
BOC leads or supports a number of research programmes, clinical trials and patient
care opportunities, in addition to running clinical seminars on the use of medical
gases for the relief of pain and
respiratory problems. In 2005, BOC provided £400,000 to sponsor several
studies on respiratory issues, lung cancer and chronic obstructive pulmonary
disease (COPD), with a major study being conducted on bronchiolitis at St Marys
Hospital, Paddington. BOC also supports several clinical bodies, jointly founding
the COPD consortium with the British Thoracic Society and others, and including
the long-term sponsorship of the BOC chair of anaesthesia in the UK and the Hong
Kong
College of Anaesthesiologists. In addition, it supports various patient groups
including the Patients Association in the UK.
Commitment to the arts
The
fourth BOC Emerging Artist Award, created to support promising young artists
in the UK, was won by photographer Justin Coombes, a graduate of Goldsmiths College,
University of
London. The £20,000 award is designed to cover a years studio rental
and materials, a travel bursary and the costs of a London-based exhibition at
the end of the award period. Five other artists were awarded £1,000
each as
runners-up.
Charitable donations and community involvement
Operating
within broad guidelines set by the Group, BOCs local businesses are responsible
for choosing and funding their own causes through discretionary volunteering,
donations and sponsorships. This devolved approach has resulted in support for
a rich variety of programmes that have an impact on BOCs
people and the communities in which they work and live.
In 2005, BOCs global charitable donations totalled £2,032,000, including funding for the BOC Foundation for the Environment, educational
programmes, medical research and the BOC Emerging Artist Award.
In
the UK, BOC donated £350,000 to UK-registered charities through a matched
giving scheme operated through the Charities Aid Foundation. In addition to
the numerous causes supported by matched giving, BOC also supported a number
of Group causes, including the Royal British Legion, Macmillan Cancer Relief,
Limbless Association, Unravel Mills,Voluntary Services Surrey Heath and Royal
Surrey County
Hospitals St Lukes Cancer Fund. The Groups logistics business,
Gist, donated £10,000 to schools and charities at the request of its staff
after they won a competition organised by key customer Marks & Spencer. The
money was
divided between Kent Air Ambulance, Davington Primary School, Pilgrims
Hospice, Bysingwood Primary School and Faversham Cottage Hospital. BOC is a member
of the PerCent Club.
In
December 2004, the tsunami inflicted terrible devastation on several countries
in the Indian Ocean region. BOC people and businesses in the area responded
with help of all kinds food, clothing, blankets, medicines and medical
oxygen as well as money. Across the world, BOC employees donated over £200,000
to help relieve this disaster. Their personal generosity was matched in every
region by BOC (double matched in most cases), bringing the total raised for
the tsunami victims to £570,000. One example of the enormous support from
BOC employees around the world was BOC in Pakistan and Bangladesh, whose employees
contributed one days salary to provide relief to victims. Another example
was twelve employees from BOC Edwards manufacturing site in Shoreham, who
raised over £20,000 by cycling up Mount Snowdon in Wales.
Through matched giving, BOC and its employees also contributed £125,000 to the American Red Cross in support of the hurricane Katrina relief effort and
to a special fund to help afflicted BOC employees. BOC also made emergency deliveries of nitrogen to a bottling plant to speed up the distribution of drinking water to local communities around New Orleans.
In the UK, BOC Edwards sponsored Sussex Business Awards manufacturer of the year category for the second year running. BOC Edwards
sponsorship of the Seishin Judo Club in East Grinstead was matched by government body Sportsmatch and named runner-up in their annual awards ceremony. For the second year running, two drivers from Gists Faversham site delivered a trailer of
much needed furniture and aid to schools in Belarus. In July, BOC medical gas teams across the UK ensured that victims of the terrorist attacks in London got the supplies they needed, delivering 2,500 emergency cylinders to the capital.
In
the US, employees continued to assist the United Way charitable appeal through
financial donations, volunteering and collections of supplies for needy children.
All
financial donations were matched by the business. BOC sponsored the building
of a home for a needy family in Ohio, through the Maumee Valley Habitat for Humanity
initiative. A BOC leadership team spent a day helping to build the house in
Toledo, where BOC is building a hydrogen plant to serve oil companies producing
cleaner burning fuels.
Social,
environmental and ethical performance |
35 |
||||
In Chile, BOC
supported several charities, notably those caring for and educating disadvantaged
children. In Venezuela, BOC made regular donations to charities in Valencia
in support of impoverished children, health and the environment. A donation
was also made to the health corporation in the state of Aragua. BOC in Colombia
supported the Noel childrens hospital and Aburra Norte young community
leaders.
In the south Pacific, the business matches employee donations as a matter of course. BOC in Australia launched the Rotary Youth Driver Awareness road safety
programme, influencing attitudes and behaviour of young people before they start driving. The business continued its long-established relationship with the Malcolm Sargent Cancer Fund, now known as Redkite. Support includes volunteering and a
scholarship programme whereby six young people with cancer receive financial support from BOC. BOC received an award from the New South Wales Cancer Council for its long-term support of Daffodil Day.
In
South Africa, employees at BOCs subsidiary Afrox continued to support their
community involvement programme (CIP), which helps over seventy institutions
dealing with disadvantaged children. As in previous years, the main event of
the
year was Bumbanani Day (meaning lets build together), when
8,000 children attended events hosted by BOC staff. The aim of the day is to
celebrate the relationship that Afrox staff have built up with the children
throughout the year and the achievements they have brought about through their
involvement. In addition, the Afrox donations committee supplemented CIP funds
on certain
projects. For example, a delivery van was donated to Takalani, a home for disabled
children, and four other CIP childrens homes received additional financial
support to help with upgrading and refurbishment. Gas and welding equipment were
donated to a welding school in Richards Bay and to a skills development initiative
in Johannesburg. Funds were also allocated to: build a home for destitute children
in Postmasburg, a rural town in the Northern Cape; provide a borehole and water
pump at a school in Limpopo Province; purchase desks, chairs and maths sets for
two other schools in the same province; and support the University of South Africas
Mathematics TeachersTraining
Project.
Across
Asia, employees supported a wide variety of charities and community organisations.
Every BOC business unit in Asia donated generously to the tsunami appeal. In
Malaysia, employees sponsored several programmes in support of local hospitals,
underprivileged and handicapped children and old peoples homes. In China, BOC provided scholarships to students in Xian
Jiaotong University, which is the leading institution for cryogenic engineering
in the country.
In
India, in addition to supporting a number of poverty, disease and disaster relief
funds, BOC employees donated gifts to several orphanages to commemorate the 70th
year of BOCs presence in India. In Pakistan, BOC continued its support
for organisations engaged in healthcare, social and literacy projects, as well
as the conservation of national heritage. During the year, recipients of donations
included: the Layton Rehmatulla Benevolent Trust, an organization dedicated to
providing free eye care; Friends of APWA Pakistan, a voluntary organization committed
to the development and care of the underprivileged women and children; the Mohatta
Palace Museum that fosters awareness and appreciation of the history and cultural
heritage; and the Aga Khan Medical Hospital and Foundation.
36 | The BOC Group plc Annual report and accounts 2005 |
Research, development and information technology
Research and
development (R&D)
Research
and development is conducted around the world with key sites located in north
America, the UK and Japan. The Group Technical Centre (GTC) in Murray Hill,
New Jersey, is a primary
R&D location for market applications for Process Gas Solutions and for electronic
materials for BOC Edwards. Co-ordination of R&D
is managed through the Group technology council. The council also meets regularly
with the Group new business development forum to ensure the opportunities and
risks from technological change are understood and, where appropriate, exploited.
Process
Gas Solutions undertakes internal development, forms alliances and partnerships
with universities and customers, licenses or acquires technologies from third
parties and leverages governmental funding to progress key developments. Internal
developments use its core technical competencies while external partnerships
give access to additional competencies.
In
2005 BOC successfully commissioned the cryogenic refrigeration system for the
high temperature superconducting (HTS) cable project at Albany, New York. This
34.5 kV HTS cable will form part of the Niagara Mohawk utility grid. BOC was
responsible for the cryogenic system, monitoring and interfacing with the cable
system, working with the Niagara Mohawk utility company. The project drew on
BOCs strengths in heat and mass transfer and its ability to manage remote
operations infrastructures.
Additional
licenses were signed during the year for BOCs proprietary glass melting
technology, CGM, which is based on its combustion and modelling competencies.
Major glass companies were willing to publicise their results and allow other
glass
companies to visit their installations. These companies include Owens-Corning,
Pilkington, Anchor Glass and LG Philips, representing the fibreglass, flat glass,
container glass
and TV glass segments respectively.
BOCs
knowledge of adsorption and materials has been applied to the continuing development
of an oxygen generation process. Based on the selective oxygen sorption properties
of specific ceramic materials it has the potential to reduce substantially the
cost of oxygen for certain applications in future chemical and power plants.
As part of a European Union funded project, BOC has identified promising new
materials
for use in oxy-fuel coal boiler-based power plants. Pilot
demonstration of the process is being progressed with government funding in the
US and the European Union.
BOC has excellent access to hydrogen/synthesis gas production technology through Linde BOC Process Plants. In addition, BOC continues to develop novel
ceramic-based technologies that offer potential step change improvements for the production of hydrogen and synthesis gas.
BOC is working with Ceres Power of the UK jointly to develop fuel cell-based systems for generating electricity, using a variety of cylinder gases. BOC
developed and commercialised a helium conservation system for the optical fibre manufacturing industry and licensed the technology to Fibre Ottiche Sud, a division of Pirelli. This technology improves overall efficiency substantially and reduces
helium wastage.
Based on its combustion and modelling competencies, BOC successfully commercialised a new way to enhance the productivity of steel from basic oxygen furnaces
and reached commercial agreements for licensing the technology to leading steel producers.
BOCs
heat and mass transfer experience enabled it to develop and commercialise a food
freezing technology to crust-freeze luncheon meat logs prior to slicing, allowing
customers to increase the speed of their production lines and overall product
yield. It also eliminates product handling, increases the efficiency of cryogenic
freezing and makes more efficient use of floor space.
For BOC Edwards, the pace of innovation in the silicon semiconductor market is unabated with leading edge customers following a two year technology cycle. In
the storage market the pace is even more rapid with storage capacity doubling every year. Fab investments have generally been at or below those in 2004 with the exception of the flat panel area where investments have been higher than
predicted.
Emphasis
in product development has been on reducing new products demand for power
and utilities. Monitoring and control capability helps create products with these
capabilities, including active utility control. A sensor-less turbomolecular
pump with an integrated controller, which was introduced this year, is smaller,
easier to install, yet has better performance with lower
vibration.
Energy
and environmental concerns drive new abatement technology. The Zenith Plasma
for Etch gives excellent destruction and low cost of ownership for customers
that prefer non-combustion abatement technology. Liquid abatement systems for
copper can be installed at points of use or throughout a production facility.
In the general vacuum business, new products for the scientific sector offer cost-reduction and enhanced performance. Lower-cost web-enabled sales channels
have been introduced for our broad customer base.
The pharmaceutical business supplied its first systems containing a patented non-contact weighing system. The application, which uses nuclear magnetic
resonance technology, has received approval from the US Food and Drug Administration and is incorporated in several new vial loading products.
Industrial and
Special Products installed prototypes of a new thermodynamic cylinder filling
package at two sites handling scientific and industrial gases. Thermodynamic
modelling gives real time control and compensates for raw material impurities
and other system variations, resulting in tighter mixture tolerances and better
production efficiency.
Research,
development and information technology
| 37
|
||||
Among areas of
development undertaken by the industrial products technology group are oxy-fuel
cutting, the cryogenic cooling of welds, pipeline welding and shielding gas mixtures.
The cold spray coating process that uses helium or nitrogen is being used in
a number
of new applications and has been accompanied by the successful introduction of
a new helium recovery system. The design and development of new cylinder packages
continues, concentrating on valves with integrated regulators and valve guards.
A
web-based global fabrication technical library was launched, designed to support
technical and product training initiatives.
The
medical business continues to research the clinical application of a variety
of gases, including heliox (a mixture of oxygen and helium) that has demonstrated
promising results in a number of areas, including asthma and brochiolitis in
infants and chronic obstructive pulmonary disease in adults. The BOC Chair of
Anaesthesia and Intensive Care has been awarded to Professor David Menon of
Cambridge University.
In
special products, work continues on a new environmentally friendly fumigant,
Vapormate, which has achieved product registration in Australia and New
Zealand.
Total
R&D expenditure in 2005 was £43.2 million compared to £41.6 million in 2004 and £39.9
million in 2003.
Information management
The information
management (IM) team reports its performance against four criteria: delivering
innovation, creating value, enabling the business and operating efficiently.
It also has measures for developing its people and for its safety performance.
All
users are surveyed regularly to ensure IMs performance matches their needs. As
well as reporting regularly on its short-term performance, IM this year updated
and had
approved its five year strategy.
Development
work continues in areas as diverse as wireless technologies, network access,
telephony, and knowledge and document management. The SAP computing system has
been deployed further, notably to BOC Edwards in north America and more countries
in Asia, and deployment has started of a global asset management system. An IM
helpdesk has been set up that is available to all employees, all the time. It
replaces a number of regional centres. The global data centre, based in the UK,
is now well established and undertakes data processing for BOC businesses around
the world.
38 | The BOC Group plc Annual report and accounts 2005 |
Risk factors |
This document contains certain forward-looking statements which involve risk and uncertainty as they relate to future events and circumstances. The following risk factors, as well as those discussed on pages 56 and 57 of the financial review could cause actual results to differ materially from those expressed or implied by these forward-looking statements:
BOC is affected by the semiconductor business cycle
Manufacturers of
semiconductors represent BOC Edwards major customer base, and BOC Edwards profitability is directly linked to the demand of these manufacturers for vacuum
equipment, services and industrial gases. The semiconductor industry has experienced significant growth over the long term, but is cyclical in nature. Any improvements in the level of demand for BOC Edwards products or services may not be
sustained due to reduced demand from end users of technology products and/or excess supply of semiconductors. The competitive nature of the semiconductor industry can reduce profit margins for suppliers of products and services to semiconductor
manufacturers. Either of these factors or a combination could adversely impact BOCs financial results. Any long-term reduction in the growth pattern of the semiconductor industry could also have a negative impact on BOCs
financial
results.
Acquisitions
may not be successful in achieving intended benefits and synergies BOC has completed a number of acquisitions in recent years as part of its growth strategy and may make acquisitions in the future. While BOC identifies expected synergies, cost savings and growth opportunities prior to completing any acquisition, these benefits may not be achieved owing to, among other things: |
|
| delays or difficulties in completing the integration of acquired companies or assets; |
| higher than expected costs or a need to allocate resources to manage unexpected operating difficulties; |
| diversion of the attention and resources of BOCs management; |
| inability to retain key employees in acquired companies; |
| inability to retain key customers; and |
| assumption of liabilities unrecognised in due diligence. |
The
growth of BOCs gases business will depend on the ability to win
and execute large projects profitably BOC, through its Process Gas Solutions (PGS) line of business, has a strategy for growth that requires significant investment each year to serve key customers in different geographies. Failure to execute projects successfully for these customers will impact PGSs ability to win new projects from these customers, and therefore may impact BOCs future financial results. The specific risks associated with major projects include: |
|
| failure to complete the project on time owing to unforeseen construction problems (which may require BOC to pay penalties under the terms of the customer contract); |
| failure of the plant to deliver the contracted volumes and quantities of product required by the customer because of design errors or errors in manufacturing or construction (which may require BOC to pay penalties under the terms of the customer contract); and |
| inability to operate the plant at costs assumed in BOCs financial evaluation of the project. |
The
safety of BOCs operations is critical to success Industrial gases are hazardous substances and BOC recognises that managing safety in operations, transportation and products is critical to achieve growth and financial results. Failure to maintain high levels of safety can result in a number of negative outcomes, including: |
|
| fines and penalties for breaches of safety laws; |
| liability payments and costs to employees or third parties arising from injury or damage; |
| exclusion from certain market sectors deemed important for future development of the business (such as medical gases); and |
| damage to reputation. |
Additionally managing social, environmental and ethical matters is key to BOCs reputation.
BOC operates in over 50 different countries and is therefore exposed to economic,political, business and natural catastrophe risks associated with international operations
BOCs
overall success as a business with global operations depends, in part, upon its
ability to succeed in differing economic, political and business conditions.
BOC encounters different legal and regulatory requirements in numerous jurisdictions.
These include taxation laws, environmental regulations, regulations concerning
operational standards and competition laws. BOC is also confronted by political
risks such as the
expropriation of assets and the inability to export currency. The business risks
and challenges faced in each geography include the need to manage credit risks
of local customers, appointing and retaining key staff, general economic conditions
locally and currency fluctuation. Recognition of changing market conditions
in local geographies is critical to BOCs long-term success, particularly
those where BOC anticipates significant investments to achieve growth, for example
China. Additionally, a good understanding of political and economic risks is
essential to achieve success from investments in new geographies. BOCs
operations are exposed to varying degrees of natural catastrophe risk, such as
earthquake and flood, as well as security risk, in the different countries in
which BOC operates.
BOC operates in a highly competitive environment
The
industrial gases market is very competitive, with several large competitors and
a significant number of smaller local competitors in different territories. Although
the current trend in the industry is to seek price increases for industrial
gases, the industry has experienced falling prices in previous years. There is
no guarantee that the current trend will continue and there is a risk that competitors
will seek to maintain or
increase market shares by reducing prices. These price reductions would result
in lower revenues, profits and cash flows.
Risk factors | 39 |
BOC relies on development of,or access to,technology to support business growth
BOCs success is dependent in part on its continued investment in technology to develop new products and services across all businesses, new applications for existing products or to
design effective means for producing industrial gases. Failure to access or develop technology or anticipate, manage or adopt technological changes in operations or product applications on a timely basis will have a material impact on BOCs
future results. For example, the rapid development of technology in the semiconductor
sector requires BOC Edwards to be aware of changes in customer technology requirements
and to introduce new products to meet those requirements in a timely manner.
Failure to do so could result in reduced market share and profitability.
Recognising and anticipating changes in the manufacturing economy is key to BOCs
success
BOCs
industrial gas businesses serve a wide range of manufacturing customers in major
geographies such as the US, UK, Japan and Australia. This is particularly true
of the Industrial and Special Products line of business which provides products
and services to customers involved in the welding and cutting of metal, a major
source of revenue for this division. As customers in these traditional manufacturing-based
economies seek to
move their manufacturing operations to lower cost territories in, for example,Asia
and Latin America, the risk arises that BOCs
operations in the major geographies will have lower growth opportunities. Failure
to recognise these trends and manage the consequences, through the development
of alternative markets and/or meeting demand in higher growth territories, could
have a negative impact on future Group financial results.
BOCs success depends to a significant extent on its key personnel and employees
BOCs performance depends on the skills and efforts of its employees and management team across all of its businesses. BOC recognises that failure to attract new talent and retain
existing expertise, knowledge and skills in operations, products and infrastructure areas such as information technology could have a negative impact on revenues and profits. In addition, the success of BOCs acquisitions may depend, in part,
on BOCs ability to retain management personnel of acquired companies.
Litigation may have an adverse impact on financial results
The global nature
of BOCs business exposes it to the potential for litigation from third
parties. From time to time BOC is involved in lawsuits, resulting from current
and past operations or products. The outcome of these lawsuits may result in
damages and awards which could have a material impact on BOCs
profitability, its business operations or financial condition. Examples of litigation
in the US for past products include allegations of injury arising from the use
of welding electrodes previously manufactured and distributed by BOC in the US.
Increased energy costs could reduce profitability
The production
of industrial gases requires significant amounts of electrical energy. Energy
costs are a key component of the cost of manufacturing industrial gases, and
increases in these costs can impact profitability if they cannot be passed on
to customers. Accurately predicting trends in energy costs is difficult to achieve
as energy costs are to a large extent subject to factors beyond the companys
control for
example, political conditions in oil producing regions. BOC also operates large
fleets of commercial vehicles in certain major geographies. An increase in energy
costs associated with the use of these commercial vehicles may negatively impact
profit
levels.
Further
consolidation between major competitors may impact BOCs competitive
position A merger between any of the major competitors to BOC within the principal geographies, subject to competition authority consent, could result in a longer-term deterioration of BOCs competitive position resulting in reduced levels of growth. Possible consequences could include: |
|
| an uncompetitive cost base for large projects; |
| an inability to participate in further consolidation due to competition concerns; |
| retention and/or recruitment of key personnel; |
| weakened geographical positions. |
Managing joint venture relationships is a key success factor for BOC
BOC needs to ensure that the selection of joint venture partners in new ventures and the relationships with partners in existing relationships is managed effectively to ensure the full
potential for the joint venture is achieved. Failure to achieve alignment of objectives and manage relationships effectively may negatively impact future growth and profit levels.
Failure to renew major contracts could reduce profitability
All of BOCs
businesses operate in very competitive markets. The loss of major contracts through
competitive forces, changes in customer purchasing strategy or changes in customer
location, could have a negative impact on Group financial results.
Identifying growth opportunities and productivity improvements are necessary for longer term success
Failure to identify
and execute growth and productivity opportunities effectively will limit increases
in profitability. These risks can materialise from inadequate processes or a
lack of
resources to identify opportunities and exploit them.
Adoption of accounting changes or new regulations can increase costs and reduce profitability
The implementation of new accounting requirements (for example, International Financial Reporting Standards) or regulations (for example, the US Sarbanes-Oxley Act) can incur significant
costs which reduce profitability. Increased costs arise through recruitment of additional resources, consultancy fees to support implementation or increased external audit fees.
40 | The BOC Group plc Annual report and accounts 2005 |
Operating review |
Introduction
The Groups
results are prepared under UK Generally Accepted Accounting Principles (GAAP)
and comply with UK Companies Act requirements. While the UK GAAP reporting basis
provides the core information for users of this report and accounts to understand
the financial performance of the Group, management believes that users will be
assisted in understanding the performance relative to previous periods by presenting
the results in
an alternative manner. This presentation isolates the impact of currency movements
from year to year and eliminates the impact of exceptional or non-recurring items. This
is consistent with the basis used by management to measure performance of the
business and is a component of variable compensation plans. The elements of this
alternative presentation are described in more detail below.
Impact of currency movements
The Group has operations
in some 50 countries around the world and the majority of its profit is generated
outside the UK. Results of overseas operations are translated at the average
rates of exchange against sterling for the year. Changes in such rates from
year to year can significantly affect the Groups results when these are
presented in pounds sterling. In some cases, such changes may make it difficult
to understand underlying business performance trends without providing additional
information. For example, the average value of the US dollar to pounds sterling
changed by three per cent in 2005 compared with 2004. It is important to highlight
such currency
movements to users of financial information to help them understand business
and regional performance.
Consequently,
management has for many years monitored business performance on a constant currency basis.
This basis eliminates the impact of changes in the rates of exchange used to
translate the results of overseas businesses into sterling by retranslating the
results of the comparative year at the rates of exchange used in the current
year. This is the basis for all internal management
reporting throughout the year.
In
this operating review, the comparison of financial performance between years
may in places be referred to as on this constant currency basis.
Comments on all segmental performance are on a constant currency basis.
The impact of changes in the rates of exchange used to translate the results of overseas businesses into sterling is shown in the table below.
Impact of | 2003 results | Impact of | 2004 results | ||||||||||
2003 results | movements | (at 2004 rates | 2004 results | movements | (at 2005 rates | ||||||||
(as reported) | in currency | of exchange) | (as reported) | in currency | of exchange) | ||||||||
£ million | £ million | £ million | £ million | £ million | £ million | ||||||||
Turnover (including share of | |||||||||||||
joint ventures and associates) | |||||||||||||
Process Gas Solutions | 1,242.7 | (71.1 | ) | 1,171.6 | 1,275.2 | (9.4 | ) | 1,265.8 | |||||
Industrial and Special Products | 1,751.2 | (19.6 | ) | 1,731.6 | 1,782.3 | 6.9 | 1,789.2 | ||||||
BOC Edwards | 684.1 | (39.4 | ) | 644.7 | 816.5 | (5.5 | ) | 811.0 | |||||
Afrox hospitals | 353.4 | 41.4 | 394.8 | 432.1 | 11.6 | 443.7 | |||||||
Gist | 291.8 | (0.1 | ) | 291.7 | 293.2 | 0.2 | 293.4 | ||||||
Total | 4,323.2 | (88.8 | ) | 4,234.4 | 4,599.3 | 3.8 | 4,603.1 | ||||||
Operating profit | |||||||||||||
Process Gas Solutions | 177.1 | (10.3 | ) | 166.8 | 189.5 | (0.6 | ) | 188.9 | |||||
Industrial and Special Products | 238.2 | 3.1 | 241.3 | 253.9 | 3.0 | 256.9 | |||||||
BOC Edwards | 7.9 | (1.1 | ) | 6.8 | 46.8 | 0.4 | 47.2 | ||||||
Afrox hospitals | 46.1 | 5.4 | 51.5 | 59.8 | 1.6 | 61.4 | |||||||
Gist | 29.2 | 0.1 | 29.3 | 25.1 | | 25.1 | |||||||
Corporate | (59.9 | ) | 6.1 | (53.8 | ) | (15.6 | ) | 0.5 | (15.1 | ) | |||
Total | 438.6 | 3.3 | 441.9 | 559.5 | 4.9 | 564.4 | |||||||
Adjusted operating profit | |||||||||||||
Process Gas Solutions | 184.0 | (10.5 | ) | 173.5 | 190.3 | (0.6 | ) | 189.7 | |||||
Industrial and Special Products | 242.7 | 2.8 | 245.5 | 269.5 | 2.6 | 272.1 | |||||||
BOC Edwards | 18.5 | (1.5 | ) | 17.0 | 47.8 | 0.4 | 48.2 | ||||||
Afrox hospitals | 46.1 | 5.4 | 51.5 | 59.8 | 1.6 | 61.4 | |||||||
Gist | 29.2 | 0.1 | 29.3 | 25.1 | | 25.1 | |||||||
Corporate | (14.9 | ) | 1.5 | (13.4 | ) | (15.6 | ) | 0.5 | (15.1 | ) | |||
Total | 505.6 | (2.2 | ) | 503.4 | 576.9 | 4.5 | 581.4 | ||||||
Exceptional or non-recurring items
Management believes that to present the results of the Group in the most meaningful way, items of an exceptional nature should be separately identified and disclosed. This enables users of
the information to have a better understanding of underlying business performance. Examples of such items in 2005 include the profit on disposal of the Afrox hospitals business in Africa and costs of restructuring in BOC Edwards. Included in 2004
were the loss on disposal of the packaged gas business in the US, costs relating to the subsequent restructuring of the remaining US business and charges relating to the integration process in Japan that began in 2003 following the merger of the
industrial and medical gases businesses there of BOC and Air Liquide to form Japan Air Gases.
Operating review | 41 | |
Exceptional items include those items classified as both operating and non-operating under UK GAAP.
The review of results excluding exceptional items is part of the normal internal management reporting process. The growth in operating profit excluding
exceptional items is also one of the measures used in the variable element of the senior management compensation scheme.
Further information regarding the exceptional items is given in the financial review on page 55. An analysis of all operating and non-operating exceptional
items is given in note 2 b) to the financial statements on page 97.
In
this review, the adjustments to eliminate exceptional items have been made to
operating profit (both Group and by segment), profit before tax and earnings
per share. Exceptional items are commented on in the Group results section as
well as in the individual business segments to which they relate. A reconciliation
of these adjusted items to the equivalent UK GAAP measure is shown in the profit
and loss
account on page 86. When any results or measures used in this review have been
adjusted to exclude exceptional items, they are referred to as adjusted.
Within the individual business segments of the operating review, operating exceptional items are commented on separately. Comments on other aspects of
financial trends and performance are based on adjusted operating profit. This provides more meaningful comment on underlying business performance.
A reconciliation of adjusted operating profit to operating profit is given in the table below.
2005 | 2004 | 2003 | |||||||||||||||||
Adjusted | Operating | Adjusted | Operating | Adjusted | Operating | ||||||||||||||
operating | exceptional | Operating | operating | exceptional | Operating | operating | exceptional | Operating | |||||||||||
profit | items | profit | profit | items | profit | profit | items | profit | |||||||||||
£ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | £ million | |||||||||||
Process Gas Solutions | 207.2 | | 207.2 | 190.3 | (0.8 | ) | 189.5 | 184.0 | (6.9 | ) | 177.1 | ||||||||
Industrial and Special Products | 289.4 | | 289.4 | 269.5 | (15.6 | ) | 253.9 | 242.7 | (4.5 | ) | 238.2 | ||||||||
BOC Edwards | 38.1 | (20.7 | ) | 17.4 | 47.8 | (1.0 | ) | 46.8 | 18.5 | (10.6 | ) | 7.9 | |||||||
Afrox hospitals | 37.2 | | 37.2 | 59.8 | | 59.8 | 46.1 | | 46.1 | ||||||||||
Gist | 24.5 | | 24.5 | 25.1 | | 25.1 | 29.2 | | 29.2 | ||||||||||
Corporate | (32.2 | ) | | (32.2 | ) | (15.6 | ) | | (15.6 | ) | (14.9 | ) | (45.0 | ) | (59.9 | ) | |||
Total Group | 564.2 | (20.7 | ) | 543.5 | 576.9 | (17.4 | ) | 559.5 | 505.6 | (67.0 | ) | 438.6 | |||||||
Other non GAAP measures
This review also
presents return on capital employed (ROCE) and adjusted return on capital employed.
Adjusted return on capital employed removes exceptional items from the measure
of operating profit used in the calculation. Adjusted return on capital employed
is used by management for reasons similar to those described above.
A
reconciliation of these two measures is shown below.
2005 | 2004 | 2003 | |||||||||||||||||
Average | Average | Average | |||||||||||||||||
Operating | capital | Operating | capital | Operating | capital | ||||||||||||||
profit | employed | ROCE | profit | employed | ROCE | profit | employed | ROCE | |||||||||||
£ million | £ million | % | £ million | £ million | % | £ million | £ million | % | |||||||||||
Adjusted ROCE | 564.2 | 3,478.3 | 16.2 | 576.9 | 3,752.4 | 15.4 | 505.6 | 4,010.5 | 12.6 | ||||||||||
Operating exceptional items | (20.7 | ) | | (17.4 | ) | | (67.0 | ) | | ||||||||||
ROCE | 543.5 | 3,478.3 | 15.6 | 559.5 | 3,752.4 | 14.9 | 438.6 | 4,010.5 | 10.9 | ||||||||||
1. | ROCE is operating profit as a percentage of the average capital employed excluding net pension liabilities. |
The Group commentary
in this review also comments on free cash flow. Free cash flow is a measure
often referred to by BOC management and other users of financial information
to highlight the cash flow available from underlying ongoing business operations
before acquisition and disposal activity. Whether or not this remains positive
over time is an indicator that dividends to shareholders are being paid out
of cash generated by
existing Group businesses. As such it is a useful additional measure of financial
performance.
A reconciliation of this measure to the nearest equivalent UK GAAP measure, net cash flow, is shown below.
2005 | 2004 | 2003 | |||||
£ million | £ million | £ million | |||||
Free cash flow | 18.6 | 257.9 | 141.8 | ||||
Exceptional cash items | (16.9 | ) | (11.9 | ) | (28.3 | ) | |
Acquisitions and disposals1 | 59.2 | 92.5 | (118.3 | ) | |||
Other items within capital expenditure and financial investment: | |||||||
Purchases of intangible fixed assets | (0.6 | ) | (0.2 | ) | (1.2 | ) | |
Net sales/(purchases) of current asset investments | 4.7 | (0.9 | ) | 16.6 | |||
Purchases of trade and other investments | (3.4 | ) | (3.8 | ) | (3.3 | ) | |
Sales of trade and other investments | 30.0 | 5.6 | 5.3 | ||||
Net cash inflow before use of liquid resources and financing | 91.6 | 339.2 | 12.6 | ||||
1. | Acquisitions and disposals in 2005 is shown after an adjustment of £69.6 million relating to the disposal of the Afrox hospitals business. This comprises £54.2 million for the minority interest element of the special dividend paid to the shareholders of African Oxygen Limited following receipt of the proceeds of disposal and £15.4 million for the tax paid on the special dividend. |
42 | The BOC Group plc Annual report and accounts 2005 |
Operating review (comparing 2005 with 2004) |
|
Group
Turnover
including the Group share of joint ventures and associates was £4,605.0 million in 2005, similar to the £4,599.3 million reported in 2004. Operating profit was
£543.5 million, down three per cent compared with £559.5 million in 2004. After crediting operating and non-operating exceptional items totalling £87.9 million and charging net interest and other financing items of £58.5
million, profit before tax was £593.6 million, up 44 per cent compared with £412.3 million in 2004. Earnings per share were 74.1p, up 39 per cent compared with 53.5p in 2004. Excluding the exceptional items, adjusted operating profit for
the year was £564.2 million, adjusted profit before tax was £505.7
million and adjusted earnings per share were 67.5p, a record level for BOC.
Comparisons
with 2004 are affected by exchange rate movements. For the currencies that principally
affect the Groups results, movements in the
Australian dollar and the South African rand were favourable and movements in
the US dollar and Japanese yen were adverse. If the results of a year ago had
been translated at the rates applied to this year, turnover would have been increased
by
£3.8 million. There would have been an increase in operating profit of £4.9
million and an increase in adjusted operating profit of £4.5 million. Adjusted
profit before tax would have been £5.2
million higher and adjusted
earnings per share would have been 0.5p higher.
The table set out below summarises results reported both under UK GAAP and as adjusted. Results for 2004 are shown both as reported in that year and on a
constant currency basis.
1 | |||||||
2005 | 2004 | 2004 (at 2005 exchange rates) |
|||||
Turnover including share of joint ventures and associates (£ million) | 4,605.0 | 4,599.3 | 4,603.1 | ||||
Operating profit (£ million) | 543.5 | 559.5 | 564.4 | ||||
Adjusted operating profit (£ million)2 | 564.2 | 576.9 | 581.4 | ||||
Profit before tax (£ million) | 593.6 | 412.3 | 420.5 | ||||
Adjusted profit before tax (£ million)2 | 505.7 | 504.3 | 509.5 | ||||
Earnings per share | 74.1 | p | 53.5 | p | 54.5 | p | |
Adjusted earnings per share2 | 67.5 | p | 63.2 | p | 63.7 | p | |
1. | A reconciliation of turnover, operating profit and adjusted operating profit for 2004 at 2004 and at 2005 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted results with UK GAAP results is shown on page 41 and in the profit and loss account on page 86. |
Exceptional items in 2005 amounted to a profit of £87.9 million. This comprised £84.9 million profit on the disposal of a majority shareholding in Afrox Healthcare Limited,
£13.2 million profit relating to the disposal in 2004 of the US packaged gas business, £10.5 million profit on the disposal of the majority of a shareholding in the US beverage dispense company, NuCo2 Inc, partly offset by a charge of
£20.7 for restructuring in BOC Edwards.
Exceptional
items in 2004 amounted to a charge of £92.0 million. This comprised a loss of £79.5 million on disposal of the US packaged gas
business, a charge of £14.8 million for restructuring the remaining business in the US following the disposal, a charge of £2.6 million relating to the integration of the industrial and medical gases businesses of BOC and Air Liquide in
Japan, and a profit of £4.9 million on the disposal of fixed assets.
Adjusted
return on capital employed for the year to 30 September 2005 was 16.2 per cent.
Return on capital employed for the year to 30 September 2005 was 15.6 per cent.
Free cash flow (as defined on page 41) was £18.6 million in 2005. Net cash flow, after acquisitions, disposals and other investing activities, and including exceptional cash items, was £91.6
million in 2005. A
reconciliation of these measures is shown on page 41.
A first interim
dividend for 2005 of 15.9p per share was paid in February 2005 and a second interim
dividend of 25.3p per share was paid in August 2005. In aggregate this was a
3 per cent increase over the annual dividend of the previous year. A first interim
dividend for 2006 of 16.3p per share has been declared for payment in February
2006.
Capital
expenditure by subsidiaries (including interest capitalised) was £397.3 million in 2005, compared with £256.1 million in 2004. This was
covered by cash inflow from operating activities. Capital expenditure by joint ventures and associates was £285.9 million in 2005, of which the BOC share was £144.0 million. Equivalent expenditure in 2004 was £109.0 million, of
which the BOC share was £49.2 million. The Group also made acquisitions of businesses of £57.1 million in 2005 and proceeds from disposals were £224.1 million. Equivalent items in 2004 were £50.9 million and £98.3
million respectively.
Process Gas Solutions (PGS) | |||||||
Change | |||||||
on 20041 | |||||||
2005 | Change | (constant | |||||
£ million | on 2004 | currency) | |||||
Turnover | 1,466.3 | +15% | +16% | ||||
Europe | 332.3 | +13% | +12% | ||||
Americas | 631.5 | +21% | +25% | ||||
Africa | 38.6 | +7% | +4% | ||||
Asia/Pacific | 463.9 | +10% | +10% | ||||
Operating profit | 207.2 | +9% | +10% | ||||
Adjusted operating profit2 | 207.2 | +9% | +9% | ||||
1. | A reconciliation of results for 2004 at 2004 and at 2005 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
Operating review (comparing 2005 with 2004) | 43 | |
The principal business
factors driving increased turnover in 2005 were increased selling prices to recover
higher power and energy costs, increased turnover within the Linde BOC Process
Plants business in the US and strong demand for gases in the steel sector for
most of the year. The recovery of higher power and energy costs is estimated to
have added approximately one per cent to turnover in 2005. Turnover also rose
because of an
increase in BOCs ownership of the business supplying nitrogen for enhanced
oil recovery in Mexico and as a result of changes to the terms of a supply scheme
contract in the US. These two factors added approximately five per cent to turnover
in
2005 compared with 2004.
New plants had a relatively smaller impact on turnover during 2005. Those contributing additional sales included a hydrogen plant supplying Citgo in the US
and a new air separation unit supplying the Sinopec and BASF joint venture petrochemical plant in Nanjing, China. New plants added less than one per cent to turnover in 2005 compared with 2004.
Operating profit
increased less rapidly than turnover principally because of the factors that
raised turnover without a corresponding impact on profit. These included increased
prices to recover higher input costs and the changed contract.
During
2005, BOC continued to be successful in winning new on-site supply contracts
with major customers in the oil and petrochemical industries and in Asia with
steel customers. Three new plants are under construction for the supply of hydrogen
to US refiners for the production of cleaner-burning fuels and to improve the
processing of heavier crude feedstocks. When these plants are fully commissioned
they are expected to approximately double BOCs worldwide hydrogen capacity. At
the same time, new air separation capacity is being added to satisfy growing
demand from steel and petrochemical customers in Asia. A new plant is being built
for a petrochemical customer at Map Ta Phut in Thailand and several large-scale
plants are under construction in China for both steel and chemical customers.
One of the largest projects currently under way is the addition of a fifth production
module to
the complex supplying nitrogen for the re-pressurisation of oil wells in the
Gulf of Mexico. This facility is already the largest nitrogen plant in the world
and has already proved its worth in boosting oil production. The new module will
increase nitrogen production by approximately 25 per cent. Much of this new capacity
is scheduled to be commissioned in late 2006 and during 2007.
There were no operating exceptional items in 2005. Operating exceptional items in 2004 were for the integration of the industrial and medical gases
businesses of BOC and Air Liquide in Japan that began in 2003.
Europe Economic conditions were mixed during 2005 with some difficult trends in the UK and Ireland partly offset by
industrial growth in Poland. The adverse impact of lower merchant volumes in some sectors was to a large extent offset by further savings from improved operating efficiency.
In
the UK, industrial gases demand from the steel and chemical sectors was strong
in 2005, leading to better tonnage volumes. However, demand for liquefied gases
declined as a result of generally sluggish activity in some manufacturing sectors
exacerbated by sharp increases in energy costs. These also impacted BOCs
merchant gases business. Higher power costs were generally recovered in selling
prices but increased prices led some customers to reduce their consumption of
industrial gases, while a few ceased production in the UK.
There has been another significant increase in UK power prices for 2006 and further selling price increases are being implemented with customers.
BOCs
business in Poland continued to benefit from general economic growth and strong
demand in the steel industry.
Sales volumes were lower in Ireland as some traditional industries declined while economic growth was concentrated in the service sectors.
Cryostars
business as a manufacturer of cryogenic pumps, expansion turbines and compressors
continued to grow in 2005. These devices are used for a variety of industrial
gas applications and for marine liquefied natural gas (LNG) tankers.
The Americas Buoyant
conditions in the steel industry led to strong demand for tonnage gases in the
US during the first half of 2005. Some slowdown became apparent during the second
half and this, together with isolated plant outages, reduced tonnage volumes
in the second half and for the year as a whole. Higher power costs were progressively
recovered by increased
selling prices in the merchant market for liquefied atmospheric gases and demand
remained firm. Carbon dioxide sales benefited from strong demand for enhanced
oil recovery rather than for food and beverage applications.
During 2005, BOC invested in new carbon dioxide capacity to satisfy demand for oil recovery in Texas and made a number of smaller investments to optimise the
US supply chain network and reduce delivery costs.
In
Latin America, the contribution from the joint venture supplying nitrogen to
Pemex for re-pressurising its Cantarell oilfield was increased in 2005 as a result
of BOCs acquisition of Duke Energys 30 per cent interest. This transaction was completed in September 2004 and increased BOCs
overall stake to 65 per cent. Construction of a fifth production module that
will increase output by approximately 25 per cent is now under way and on schedule.
Meanwhile some improvement in the efficiency of existing production units is
expected from a routine maintenance schedule that is currently in progress.
Africa Sales volumes increased in 2005 as a result of continuing firm demand for tonnage gases in the South African steel sector and increasing consumption of liquid nitrogen by food manufacturers. Higher selling prices also contributed to increased turnover. New long-term supply contracts were signed with customers in the metals and automotive components industries. During 2006, investments will be made to fulfil these contracts and to satisfy growing demand for liquefied gases in the merchant market.
44 | The BOC Group plc Annual report and accounts 2005 | Operating review (comparing 2005 with 2004) | |
Asia/Pacific Sales
growth in north Asia was supported by production from new and recently commissioned
plants in China. There was also growing demand for liquefied gases in the merchant
markets not only in China but also in Korea and in Taiwan, where available capacity
was fully utilised. Further investment by Chinas leading steel and chemicals
producers continued strongly in 2005 leading to opportunities for long-term
supply schemes.
A
new 1,400 tonnes-a-day air separation unit was commissioned by BOCs joint venture with Sinopec in Nanjing during the year and began to supply
Sinopecs new joint venture with BASF when that began operation in 2005. Two new air separation plants were also commissioned in south China to supply steel customers during 2005. Two 1,400 tonnes-a-day air separation units are under construction
to supply gases for expanded production at the Taiyuan Iron & Steel Corporation (TISCO), which is already the largest stainless steel producer in China and one of the biggest in the world. Construction of a further two similarly large air
separation units to supply the Maanshan Iron & Steel Company (Ma Steel) began
before the end of 2005.
In
Japan, demand for industrial gases from the steel, chemical and glass industries
remained strong in 2005. During the year, BOCs Japan Air Gases
joint venture brought on stream a new 2,100 tonnes-a-day plant serving a major
steel customer.
BOCs
most important PGS businesses in south and south east Asia are in Thailand, Malaysia,
Singapore and India. The major market sectors for PGS across the region are steel,
petrochemicals and the food industry.
The
Thai economy continued to expand in 2005 and BOCs business there benefited
from growth of the chemical industry. Despite a continuation of US anti-dumping
measures that held back prawn exports, there was some recovery in the food-freezing
sector leading to increased sales of carbon dioxide and liquefied nitrogen.
MIG
Production Co. Ltd (MIGP), a joint venture between BOCs Thai subsidiary Thai Industrial Gases PCL and Bangkok Industrial Gas Company Ltd has been
awarded a long-term contract to supply 800 tonnes a day of oxygen to a new mono ethylene glycol project operated by TOC Glycol Co. Ltd. (TOCGC) in Map Ta Phut, Thailand. MIGP is investing US$50 million to build an air separation unit on an adjacent
site to TOCGCs new mono ethylene glycol plant. Scheduled to come on-stream in 2006, the facility will produce 1,300 tonnes of oxygen a day, making it the largest air separation unit in Thailand. The excess capacity from the new facility will
serve the parent companies tonnage and merchant markets.
Business in Malaysia was supported by buoyant conditions in the steel sector for most of the year despite some softening of demand in the final quarter.
Demand from the Malaysian chemical industry also improved in 2005. Business trends in Singapore were positive in 2005, led by expanding activity in the chemicals and electronics sectors.
Strong demand for industrial gases by the steel, chemicals, pharmaceuticals and glass sectors coupled with positive selling price trends led to accelerated
growth in India.
BOCs
subsidiary, BOC India Ltd, has been awarded the contract for supplying the gases
requirements for an expansion programme being undertaken by Jindal Vijaynagar
Steel Limited at Bellary in Southern India. BOC India Ltd has signed a fifteen-year
agreement to supply 1,400 tonnes a day of oxygen and nitrogen and is building
a new 855 tonnes-a-day air separation unit at Bellary, which is due
to be commissioned in 2006. Management sees this latest investment of up to US$40
million as a major move in developing its strategy in southern India.
Elsewhere
in the region, business developed well in Pakistan but growth in the Philippines
was constrained by product availability. Production of oxygen at
BOCs plant at Gresik in Indonesia was limited during 2005 by the availability
of natural gas to generate power. Use of diesel fuel as an alternative led to
less efficient operation.
In Australia economic
growth continued in 2005 but at a slower rate than in 2004 and there was relatively
little new plant investment. World commodity prices remained firm leading to
sustained demand from the mineral processing and steel industries for tonnage
gases. Higher energy and labour costs in 2005 were generally recovered by increased
selling prices.
During
2005, BOC renewed its long-term contract to supply a leading titanium dioxide
pigment manufacturer.
The Government of Western Australias
environmentally friendly fuel cell bus project, which began in 2004 with three
hydrogen-fuelled buses operating in the city of Perth, was commercialised in
2005. BOCs
hydrogen purification plant and re-fuelling facility supports BP in this
project.
Water services Further business was secured during 2005 with industrial rather than municipal customers, in accordance with BOCs strategic objectives for this business. Much of the new business continued to be with food manufacturers but there was also increasing interest for water services in the chemicals and refining sectors.
Industrial and Special Products (ISP) | |||||||
Change | |||||||
on 20041 | |||||||
2005 | Change | (constant | |||||
£ million | on 2004 | currency) | |||||
Turnover | 1,721.7 | 3% | 4% | ||||
Europe | 467.0 | +4% | +3% | ||||
Americas | 322.3 | 24% | 23% | ||||
Africa | 272.3 | +18% | +19% | ||||
Asia/Pacific | 660.1 | 3% | 4% | ||||
Operating profit | 289.4 | +14% | +13% | ||||
Adjusted operating profit2 | 289.4 | +7% | +6% | ||||
1. | A reconciliation of results for 2004 at 2004 and at 2005 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
Operating
review (comparing 2005 with 2004)
| 45
|
||||
Turnover was lower in 2005 as a result of the disposal of BOCs packaged gas business in the US in July 2004 and the disposal of part of the Unique Gas business in Thailand in
December 2004. These disposals accounted for a ten per cent decrease in turnover for 2005 compared with 2004. The effect of disposals on turnover was partly offset by growth in Europe,Africa and the south Pacific region.
The
elimination of overhead costs following the US packaged gas disposal helped towards
an increase in operating profit. This together with new business won was reflected
in a £15 million increase in north American adjusted operating profit in 2005. Other factors supporting profitability were the extension of best commercial practice and best operating practice business
efficiency programmes to more parts of the world.
Further
progress was made with the refurbishment of retail stores - particularly in South
Africa and Australia - during 2005 and this led to increased sales. Retail outlets
also supported the growth of BOCs safety products business. At the same
time further comprehensive safety product contracts were won with major customers.
New
user-friendly product packages, including lightweight cylinders for emergency
services, continued to drive sales growth of medical gases. Turnover of medical
gases for BOCs major subsidiaries, joint ventures and associates (excluding
Japan) increased by seven per cent in 2005. There was also good growth in the
special products and services business, which includes scientific gases, refrigerant
gases and other packaged chemicals. Special gases turnover increased by 11 per
cent in 2005 on the same basis.
Higher petroleum prices in 2005 presented a challenge to margins in the liquefied petroleum gas businesses in Australia and South Africa but most of the cost
increases were recovered in higher selling prices.
Demand for helium remained strong worldwide, driven by increasing use of medical imaging. New helium capacity is expected to come into production in Qatar in
2006. This will make more product available to BOC but at a higher price than existing supplies.
There were no operating exceptional items in 2005. Operating exceptional items in 2004 were for the integration of the industrial and medical gases
businesses of BOC and Air Liquide in Japan that began in 2003, as well as for the restructuring of the ISP business in the US following the disposal of the packaged gas business.
Europe Increased
turnover reflected growing sales of medical and special products in the UK and
generally favourable business trends in Poland. The UK industrial market remained
flat, but BOCs business was expanded by increased sales of welding products.
Increased energy costs were recovered by increased selling prices.
Growth in the medical gases business was once again driven by the introduction of new lightweight cylinder packages and by winning hospital facilities
management contracts.
Increased
turnover of special products was based largely on growing sales of gas mixtures
for scientific applications and additional helium business. New capacity is being
added to satisfy additional requirements for Siemens Magnet Technology (formerly
Oxford Magnet Technology) the leading MRI scanner manufacturer. BOC already manages
Siemens helium requirements during manufacturing and will
now provide on-site services for Siemens magnets in hospitals. Additional sales
also resulted from the acquisition of Calors
aerosol propellants and hydrocarbon refrigerants business in the UK.
Growth
of BOCs Sureflow hospitality gas and cellar services business was curtailed
by lower sales of draught beer in the UK during 2005. Additional business was
gained in Ireland by providing cellar services for a major brewery chain.
Changes
in the provision of domiciliary oxygen in England and Wales were announced by
the National Health Service in 2005. BOC was awarded one of the 11 regional contracts
and from February 2006 will supply all forms of domiciliary oxygen to patients
for the Eastern region. It is expected that this will lead to a reduction of
BOCs home oxygen sales in the UK over the next two years. However,
the majority of BOCs UK medical gases business is with hospitals and the
emergency services, which is unaffected by this change.
The Americas The
disposal of BOCs US packaged gas business was completed on 30 July 2004
when initial cash proceeds of US$175 million were received. This business had
turnover of approximately US$240 million in 2003.
The
ISP business in the US now consists of bulk medical gases, bulk supplies to distributors,
tube trailer and liquefied helium. BOCs US overhead costs
were reduced following the disposal, as the business was then concentrated on
a much smaller number of customers. As a result the US business became profitable
in 2005.
During 2005, new distributor channels were added, new helium business was secured in the US and new bulk industrial contracts were won with biotechnology and
laser welding customers.
Buoyant conditions in the oil and gas industry helped towards an improved performance in Canada during 2005.
BOCs
global helium business grew strongly in 2005 with increasing demand in China
and Korea. During 2006 the first supplies from a new source in Qatar will enable
these markets to be served more efficiently. However the financial impact is
expected to be negative initially as additional volumes will be offset by higher
feedstock costs.
Growth
in Latin America was driven by increased sales in Venezuela and Colombia, where
the medical sector is the most important. However there was also growth in the
industrial markets served by BOCs associated company based in Chile.
Africa Lower interest rates continued to stimulate South African domestic consumption and manufacturing output during 2005,
leading to better turnover for the African region. Operating profit also increased but by somewhat less than turnover, which was additionally inflated by higher liquefied petroleum gas (LPG) prices.
Turnover grew in every part of the South African business but was led by particularly strong sales of safety products. During 2005 Afrox Safety was launched
as a business brand and an on-site safety services business was acquired. Sales of scientific gases increased but from a relatively low base.
Despite the challenge of a strong South African rand, export business also grew considerably. Plans are in place to expand production of welding products for
local use and particularly for export.
Other African countries also produced satisfactory results with particularly good performances in Kenya and Zambia.
46 | The BOC Group plc Annual report and accounts 2005 | Operating review (comparing 2005 with 2004) | |
Asia/Pacific Most of the countries in south and south east Asia achieved good results in 2005 with especially strong
performances in India,Thailand and Bangladesh. Results in India were additionally supported by a profit from the disposal of some land in Bangalore.
At the same time, trading conditions during 2005 were difficult in Malaysia and industrial activity continued to decline in Hong Kong as production drifted
to mainland China. This trend also continued to affect Taiwan but to a lesser extent.
BOCs
industrial products business remains relatively undeveloped in China. Few attractive
opportunities have been identified but growing demand for helium provides a better
prospect.
The growth of automobile production stimulated demand for welding gases and investment in special gases and packaged chemicals production facilities
supported increased sales of these products in Asia generally.
In Japan, both turnover and adjusted operating profit were similar to a year ago.
An improved performance in the south Pacific region was driven by demand from the natural resources sector and increased sales of safety products while
consumption of welding products and gases by the manufacturing sector grew more slowly. This reflects somewhat slower growth in the Australian economy than in 2004.
Growth was focused
in the mining regions of Western Australia, Queensland and Papua New Guinea.
BOC was also successful in winning significant contracts to supply safety and
personal protective products to Xstrata in Australia and to New Zealand Steel.
These added to similar contracts won with Western Mining in 2004.
The
construction of a new special gases centre is under way at Wagga Wagga, in Australia,
to meet the increasing demand for packaged chemicals such as ammonia, ethylene
oxide and sulphur dioxide. Meanwhile the gradual re-development of BOCs
retail Gas and Gear stores that began in 2004 continued in 2005 and is now approximately
two thirds completed.
BOCs
joint venture company supplying liquefied petroleum gas in Australia faced the
twin challenges of a sharp rise in input costs and the warmest winter on record
in 2005. Lower consumption for heating applications therefore led to a decline
in volumes.
BOC Edwards | |||||||
Change | |||||||
on 20041 | |||||||
2005 | Change | (constant | |||||
£ million | on 2004 | currency) | |||||
Turnover | 826.0 | +1% | +2% | ||||
Operating profit | 17.4 | 63% | 63% | ||||
Adjusted operating profit2 | 38.1 | 20% | 21% | ||||
1. | A reconciliation of results for 2004 at 2004 and at 2005 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
The upturn in semiconductor equipment spending that had helped BOC Edwards order intake and financial performance in 2004 was not repeated in 2005. At the same time, margins
continued to be adversely affected by weakness of the US dollar, which is the currency in which much of BOC Edwards revenue is earned. The adjusted operating profit for 2005 would have been approximately £9
million more if transactions had been conducted at the exchange rates of a year
ago. Adjusted operating profit was therefore lower in 2005, despite some initial
benefit from cost reduction programmes.
Where new semiconductor or liquid crystal display (LCD) business was placed, BOC was generally successful in retaining or improving its market share. Demand
for integrated subsystems combining vacuum and exhaust management technologies grew in 2005. BOC Edwards is now launching a new plasma abatement system for the destruction of ozone-depleting PFC chemicals, which are found in the exhaust streams
after etch processes in semiconductor, LCD and solar cell manufacture. BOC Edwards also became a leading supplier of subsystems for immersion lithography. For the latest generation of LCD fabrication units, BOC Edwards has also launched its own iFxK
and iHxK high-capacity pumping systems. For semiconductor applications, a new cost-effective turbomolecular pumping system, whose magnetic bearings are controlled without the use of sensors, was developed.
Demand for component cleaning services and electronic materials was slightly lower as some semiconductor production rates were reduced in 2005 to reduce
stock levels. During 2005 BOC Edwards formed a joint venture to extend its component cleaning business into Taiwan.
While nitrogen trifluoride prices continued to fall in 2005, BOC Edwards made good progress with its alternative technology of on-site fluorine generation
systems for cleaning vapour deposition chambers. Production of fluorine generators has already been established in Korea to achieve lower production and distribution costs to serve the expanding customer base in Asia.
In
October 2004 BOC Edwards expanded its electronic materials offering to include
wet chemicals for flat panel display, semiconductor, and solar cell customers
throughout Asia, by purchasing a 50 per cent ownership in Asia Union Electronic
Chemical Corporation (AUECC) . This company also formed a joint venture with Shanghai
Huayi (Group) Company to supply wet process chemicals to the growing
electronics manufacturing industry in China. Through the joint venture,AUECC
will use Shanghai as a base to produce, package and distribute a full range of
ultra high-purity process chemicals for the semiconductor and flat panel display
industries.
In
2005 BOC Edwards retained strong positions in the bulk gases markets of Taiwan
and China and improved its position in Korea. New production capacity was added
to the existing pipeline network in the Hsinchu business park in Taiwan and additional
business was obtained in the business parks at Suzhou, China. BOC Edwards has
also established a position supplying customers in the new Cheng Du park in
China. In Korea, BOC won potentially significant gases business with Samsung,
having previously been a major supplier of semiconductor equipment. BOCs
joint venture company also won new business with semiconductor manufacturers
in
Singapore.
Operating review (comparing 2005 with 2004) | 47 | |
There was better
demand for vacuum equipment from the chemicals industry and from the aerospace
industry for metallurgical applications in 2005. A general improvement in
Asian markets also
helped towards better results from BOC Edwards general vacuum business.
Vacuum pump production was expanded in the Czech Republic and some system assembly
operations
were established in Brazil during 2005.
Deliveries of pharmaceutical freeze-drying and packaging systems were at a higher level than in 2004. The establishment of a new low-cost manufacturing base
in China has opened up new possibilities for business with the fast-growing pharmaceutical industry in Asia generally and particularly in India.
Exceptional
costs of £20.7 million were charged within BOC Edwards during 2005. Some £14 million relates to the impairment of goodwill. The
remainder is a charge for restructuring. Savings of approximately £5 million
are targeted from this restructuring.
Operating exceptional items in 2004 were for the integration of the industrial and medical gases businesses of BOC and Air Liquide in Japan that began in
2003.
Afrox hospitals | |||||||
2005 £ million |
Change on 2004 |
Change on 2004 (constant currency) |
1 |
||||
Turnover | 275.1 | 36 | % | 38 | % | ||
Operating profit | 37.2 | 38 | % | 39 | % | ||
Adjusted operating profit2 | 37.2 | 38 | % | 39 | % | ||
1. | A reconciliation of results for 2004 at 2004 and at 2005 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
The disposal of the majority shareholding in Afrox Healthcare Limited to a consortium led by two major black empowerment investors was completed on 22 March 2005. African Oxygen Limited
(Afrox), BOCs subsidiary in South Africa, retains a significant interest in the hospitals business through a 20 per cent holding in the new company. Until disposal,Afrox Healthcare Limited was fully consolidated into the BOC Group accounts.
For the second half of 2005, a 20 per cent share of the results of the new company, with its adjusted operating profit and net interest charge, was included in the BOC Group profit and loss account. The comparisons above are therefore distorted by
this change.
After adjusting for this disposal and change of accounting treatment, the underlying performance of the Afrox hospitals business remained positive during
2005.
The disposal proceeds were received by Afrox in March and distributed to The BOC Group and Afrox minority shareholders by means of a special dividend in
June, followed by a share buy-back in July 2005.
Gist | |||||||
2005 £ million |
Change on 2004 |
Change on 2004 (constant currency) |
1 |
||||
Turnover | 315.9 | +8 | % | +8 | % | ||
Operating profit | 24.5 | 2 | % | 2 | % | ||
Adjusted operating profit2 | 24.5 | 2 | % | 2 | % | ||
1. | A reconciliation of results for 2004 at 2004 and at 2005 rates of exchange is shown on page 40 |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
While the market for distribution services remained difficult in the UK throughout 2005, Gist continued to expand sales with existing customers and won new business. The higher turnover
was not reflected in better operating profit, principally because of increased pension costs. Gist accounts for a substantial proportion of BOCs UK workforce and the impact of pension costs is therefore significant.
Food
business with Marks & Spencer, Gists major customer, expanded in 2005
as more new retail outlets were opened. Logistic operations for the Ocado home
food service in association with Waitrose also continued to grow. Existing services
for Carlsberg (UK) were expanded in 2005 and new business was won with Woolworths.
In
September 2005 the Van Dongen group of logistics companies based in the Netherlands
was acquired. This adds to Gists primary distribution
operations, bringing products from food manufacturers into the supply chain.
It also extends the reach into continental Europe, which is becoming an increasing
source of food products for UK retailers. This wider network has already generated
additional business between the UK and continental Europe from a number of existing
and new customers.
In
November 2005, Gist was awarded an extension to its food logistics contract with
Marks & Spencer. The contract covers the retailers growing food
business until 2011, confirming it as one of the UKs largest food logistics
contracts.
Corporate
Corporate costs
increased in 2005 partly as a result of additional spending on procedures to
ensure compliance with Sarbanes-Oxley legislation and discretionary spending
on litigation support in the US. The corporate charge also included a provision
of £4.3 million for environmental clean-up in the US.
48 | The BOC Group plc Annual report and accounts 2005 | |
Operating review (comparing 2004 with 2003) | ||
Group
Turnover including
the Group share of joint ventures and associates was £4,599.3 million in 2004, up six per cent compared with £4,323.2 million in 2003. Operating profit was
£559.5 million, up 28 per cent compared with £438.6 million in 2003. After charging operating and non-operating exceptional items totalling £92.0 million and net interest and other financing items of £72.6 million, profit
before tax was £412.3 million, up 17 per cent compared with £351.9 million in 2003. Earnings per share were 53.5p, up 20 per cent compared with 44.5p in 2003. Excluding the exceptional items, adjusted operating profit for the year was
£576.9 million, adjusted profit before tax was £504.3 million and
adjusted earnings per share were 63.2p.
Comparisons
of 2004 with 2003 were affected by exchange rate movements. For the currencies
that principally affect the Groups results, movements in the
Australian dollar and the South African rand were favourable and movements in
the US dollar and Japanese yen were adverse. If the 2003 results had been translated
at the rates applied to 2004, turnover would have been reduced by £88.8
million. There would have been an increase in operating profit of £3.3
million and a decrease in adjusted operating profit of £2.2 million. Adjusted
profit before tax would have been £2.9
million higher and adjusted earnings per
share would have been 0.2p lower.
The table set out below summarises results reported both under UK GAAP and as adjusted. Results for 2003 are shown both as reported in that year and on a
constant currency basis.
2004 | 2003 | 2003 (at 2004 exchange rates) |
1 |
||||
Turnover including share of joint ventures and associates (£ million) | 4,599.3 | 4,323.2 | 4,234.4 | ||||
Operating profit (£ million) | 559.5 | 438.6 | 441.9 | ||||
Adjusted operating profit (£ million)2 | 576.9 | 505.6 | 503.4 | ||||
Profit before tax (£ million) | 412.3 | 351.9 | 360.3 | ||||
Adjusted profit before tax (£ million)2 | 504.3 | 418.9 | 421.8 | ||||
Earnings per share | 53.5 | p | 44.5 | p | 44.9 | p | |
Adjusted earnings per share2 | 63.2 | p | 52.9 | p | 52.7 | p | |
1. | A reconciliation of turnover, operating profit and adjusted operating profit for 2003 at 2003 and at 2004 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted results with UK GAAP results is shown on page 41 and in the profit and loss account on page 86. |
Exceptional items in 2004 amounted to a charge of £92.0 million. This comprised a loss of £79.5 million on disposal of the US packaged gas business, a charge of £14.8
million for restructuring the remaining business in the US following the disposal, a charge of £2.6 million relating to the integration of the industrial and medical gases businesses of BOC and Air Liquide in Japan, and a profit of £4.9
million on the disposal of fixed assets.
Exceptional
items in 2003 comprised £43.2 million for a litigation settlement, costs of £15.5 million for completion of restructuring programmes
and £8.3 million relating to the integration of the BOC and Air Liquide
businesses in Japan.
Adjusted
return on capital employed for the year to 30 September 2004 was 15.4 per cent.
Return on capital employed for the year to 30 September 2004 was 14.9 per cent.
Free cash flow (as defined on page 41) was £257.9 million in 2004. Net cash flow, after acquisitions, disposals and other investing activities, and including exceptional cash items, was £339.2
million in 2004. A
reconciliation of these measures is shown on page 41.
A first interim dividend for 2004 of 15.5p per share was paid in February 2004 and a second interim dividend of 24.5p per share was paid in August 2004. In
aggregate this was a 2.6 per cent increase over the annual dividend of the previous year.
Capital
expenditure by subsidiaries (including interest capitalised) was £256.1 million in 2004, compared with £281.2 million in 2003. This was
covered by cash inflow from operating activities. Capital expenditure by joint ventures and associates was £109.0 million in 2004, of which the BOC share was £49.2 million. Equivalent expenditure in 2003 was £81.4 million, of which
the BOC share was £36.1 million. The Group also made acquisitions of businesses of £50.9 million in 2004 and proceeds from disposals were £98.3 million. Equivalent items in 2003 were £135.5 million and £3.9
million
respectively.
Process Gas Solutions (PGS) | |||||||
2004 £ million |
Change on 2003 |
Change on 2003 (constant currency) |
1 |
||||
Turnover | 1,275.2 | +3 | % | +9 | % | ||
Operating profit | 189.5 | +7 | % | +14 | % | ||
Adjusted operating profit2 | 190.3 | +3 | % | +10 | % | ||
1. | A reconciliation of results for 2003 at 2003 and at 2004 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
Increased turnover reflected strong demand worldwide for both steel and nonferrous metals. In addition, sales from new production facilities accounted for approximately £14 million
of the increase in turnover between 2003 and 2004.
Metal
production increased in 2004 and world metal prices firmed as a result of strong
demand from China. This benefited BOCs steel and nonferrous
metal customers in all the key markets throughout the year.
For 2004 as a whole, the food sector was buoyant outside the US despite the temporary consequences of avian flu in Asia and the imposition of US import
tariffs on prawns.
The recovery in the electronics packaging industry created exceptionally strong demand for industrial gases in the electronics packaging sector. BOC was a
leading beneficiary of this because of its strong position in Asian markets.
Operating review (comparing 2004 with 2003) | 49 | |
Several significant
new supply scheme contracts were won in 2004. BOCs hydrogen business
with refiners will be substantially increased with a new plant to supply
both a Sunoco refinery at Toledo, Ohio, and a nearby BP refinery. The hydrogen
will be used by both BP and Sunoco in the production of ultra-low sulphur
gasoline and diesel fuels.
Outside
the US, significant new business in the chemical sector was won with the Sinopec
Shanghai Petrochemical Company. BOC will form a joint venture to invest in existing
assets and then add further air separation capacity. BOCs subsidiary in
Thailand is to invest in a venture establishing a 1,300 tonnes-a-day plant to
supply TOC Glycol Co. Ltd. (TOCGC) in Map Ta Phut and to increase merchant capacity
in the area.
New business with steel customers was mainly concentrated in Asia. In January 2004, BOC announced that its joint venture with the Taiyuan Iron and Steel
Corporation (TISCO) would expand its existing 1,500 tonnes-a-day capacity with the construction of two new 1,400 tonnes-a-day air separation units.
In the UK, BOC supplies Corus at its Port Talbot, Scunthorpe, Rotherham and Redcar plants. BOC is to increase its industrial gases supply to the Port Talbot
strip products plant by 30 per cent to increase steel production locally.
Selling prices were generally firm during 2004 and sufficient to offset input cost inflation except in parts of north Asia.
Operating exceptional items in 2004 were for the integration of the industrial and medical gases businesses of BOC and Air Liquide in Japan that began in
2003.
Europe Turnover
increased in all parts of Europe except for Ireland. Adjusted operating profit
increased significantly, mainly as a result of more efficient plant operation
and careful control of costs.
In the UK, manufacturing activity remained generally weak but customer closures and relocations that had affected business in 2003 were less evident in 2004.
Rising steel production led to increased demands for oxygen.
Price increases were generally sufficient to cover higher input costs in 2004. Further increases are being implemented in 2005 to cover sharply higher
electricity prices in the UK following the expiry of a fixed price supply contract.
Cryostar manufactures cryogenic pumps, expansion turbines and compressors for a variety of industrial gas applications and for marine liquefied natural gas
(LNG) tankers. As in 2003, turnover and adjusted operating profit increased in 2004 principally as a result of demand for shipboard compression units on LNG tankers and following continued investments for gases plants in Asia.
North America Turnover
increased as a result of including a full year of syngas production for Celanese
at Clear Lake,Texas
and the start-up of a new plant supplying hydrogen to Citgos refinery at
Lemont, Illinois, in October 2003.
Adjusted operating profit was lower as a result of reduced carbon dioxide volumes to our food and dry ice customers, and reduced argon demand from the
stainless steel and wholesale sectors.
In
general, demand for industrial gases from steel customers was strong in 2004.
Liquid nitrogen volumes for food freezing applications strengthened during the
year, mitigating the reduced carbon dioxide volumes into this sector. BOCs
carbon dioxide business with beverage customers continued to make good progress
in 2004 and new business was won.
Selling prices remained generally firm and significant increases in fuel and energy costs were largely recovered with surcharges or general price
rises.
Latin America Revenues increased across the region during 2004, although business in Venezuela continued to be affected by
political uncertainty. In Brazil, BOCs new 400 tonnes-a-day plant entered production serving CST, the worlds biggest producer of slab steel.
The
benefits of re-pressurising the Pemex Cantarell oilfield in the Gulf of Mexico
with nitrogen from BOCs joint venture company continued to be
realised during the year. In May 2004 BOC agreed to buy Duke Energys 30 per cent ownership interest in the joint venture company for US$59.7 million in cash. This increased BOCs
overall stake to 65 per cent on completion in September
2004.
Africa Turnover increased and adjusted operating profit was further improved by cost savings and firm pricing trends leading to better margins. Although the stronger rand adversely affected platinum and gold mining in 2004, strong demand and firmer prices led to increased activity in the steel industry.
Japan The combination of BOCs and Air Liquides industrial and medical gases businesses in Japan took effect from January 2003. This distorts the comparison of turnover and profit for BOCs three lines of business between 2004 and 2003 and with earlier years. The results of Japan Air Gases were consolidated on an equity basis throughout 2004 and for the last three quarters of 2003. In 2004 turnover increased mainly as a result of equipment sales and adjusted operating profit increased faster as a result of achieving integration cost savings as planned.
North Asia Turnover
and adjusted operating profit increased in 2004 but at a more modest pace than
in 2003. Production plants across the region were almost fully utilised and
little new capacity came on stream in 2004.
In
China, turnover and adjusted operating profit increased in line with economic
trends but further growth was constrained by available production capacity and
by some unplanned shutdowns, mainly at customers plants.
BOC announced a new joint venture with Sinopec Shanghai Petrochemical Company Limited (SPC), a subsidiary of Sinopec Corporation, to meet the industrial
gases needs of SPC in the Jinshan District of Shanghai.
Economic conditions were stable in Korea but increased turnover and adjusted operating profit came from some additional argon and hydrogen capacity to supply
customers near Pohang.
Turnover in Taiwan increased as a result of full capacity utilisation but adjusted operating profit increased significantly as a result of improved
efficiency in plant operations.
Hong Kong also enjoyed a better economic climate in 2004 for the same reasons and adjusted operating profit was sharply better.
50 | The BOC Group plc Annual report and accounts 2005 | Operating review (comparing 2004 with 2003) |
South and South East
Asia These
regions came under the same business unit management during 2004. The economies
continued to be buoyant across both regions during the year, helped by generally
strong steel demand and a more active electronics industry in Singapore, Malaysia
and the Philippines.
The SARS infection that had adversely affected 2003 was no longer an issue in 2004 but in Thailand and Malaysia the food sector was hit by an outbreak of
avian flu.The Thai shrimp industry was further affected by the imposition of US tariffs on imports.
In
September 2004, BOCs subsidiary in Thailand announced a major investment
in new joint venture air separation capacity to supply oxygen for ethylene glycol
production and to increase the availability of products for sale in the expanding
merchant market around Map Ta Phut.
South Pacific Turnover
and adjusted operating profit were higher than a year ago.The Australian and
New Zealand economies remained generally strong in 2004.The strength of local
currencies led to some further customer plant closures but firm commodity prices
for minerals and particularly for steel enabled leading customers to prosper.
There was some increase in tonnage
volumes but volumes overall were similar to a year ago.
Electricity
prices increased in eastern Australia and more so in New Zealand. Increased costs
were passed through to tonnage customers and progressively recovered in the merchant
markets.At the same time, BOCs major plants in Australia achieved significant
cost savings as a result of implementing a global plant optimisation programme.
During
2004 BOC outsourced the transport of its bulk products to Australias leading
transport company, while retaining control of distribution and scheduling.This
change was made only after ensuring that there would be no diminution of safety
standards or the quality of service to customers.
A
hydrogen purification plant and bus re-fuelling facility to support BP in the
Government of Western Australias environmentally friendly fuel cell bus
trial came into operation during September 2004.Three hydrogen-fuelled buses
will be operating in the city of Perth.The trial is to continue for at least
the next two years.
Water services BOC acquired Environmental Management Corporation (EMC), a US water services company in October 2002. Turnover
increased modestly in 2004 but the business remained close to breakeven after the amortisation of goodwill as a result of planned costs to increase business development resources.
BOCs
strategy for water services is to focus on its industrial customers. Significant
new business was won during 2004, including a multiyear contract for process
and waste water services to a major US beef producer. Tightening regulations
for proteins in effluent seem likely to create fresh demands for water treatment
in the food industry.
Industrial and Special Products (ISP) | |||||||
Change | |||||||
on 20031 | |||||||
2004 | Change | (constant | |||||
£ million | on 2003 | currency) | |||||
Turnover | 1,782.3 | +2 | % | +3 | % | ||
Operating profit | 253.9 | +7 | % | +5 | % | ||
Adjusted operating profit2 | 269.5 | +11 | % | +10 | % | ||
1. | A reconciliation of results for 2003 at 2003 and at 2004 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
Nearly all regions
delivered better results in 2004 with increased turnover in most countries and
an overall improvement in operating margin. Robust economic conditions supported
a further improvement in the south Pacific region and Africa delivered better
results despite the handicap of the stronger currency on manufacturing and mining.
There was also some improvement in the US manufacturing economy.
At the same time further progress was made in successfully integrating the businesses recently acquired in Canada and Poland.
Sales
to the medical sector grew further in 2004 as a result of both gases and liquid
helium sales. Heliox, a new low-density breathing mixture was introduced in the
UK and in Australia. This product enables patients with obstructed airways to
breathe more easily and thereby provides time to treat the underlying problems.
Helium is also used to cool the coils of superconducting magnets in MRI
scanners. BOC not only sells the liquid nitrogen and helium cryogens but offers
a related CryoFill service, taking responsibility for filling customers magnets.
Helium sales also increased in Taiwan,Thailand and China, where significant growth
potential has been identified and where an important distributor agreement was
signed with Meike.The cost of producing and purchasing helium continued to increase
rapidly during 2004 but BOC was largely successful in recovering higher costs
in
selling prices to customers. BOC installed helium recovery systems at the University
of Liverpool in the UK and at Trane in the US during 2004.
Consistent
progress was made in growing refrigerant sales. The alliance with Hudson Technologies
for the reclaim of contaminated refrigerants began operation in the UK during
2004 and will be applied in South Africa in 2005.
BOCs
major liquefied petroleum gas (LPG) businesses in Australia and South Africa
were notably successful in managing volatile input costs and sustaining margins
during 2004 as LPG prices increased sharply.
Operating review (comparing 2004 with 2003) | 51 |
Sales of industrial
products increased in aggregate although some developed markets continued to
reflect weak manufacturing activity. Business development was helped by upgrading
the retail environment of outlets in some major markets and by the continued
introduction of safety products to the markets in the UK, Australia and South
Africa.
Operating exceptional items in 2004 were for the integration of the industrial and medical gases businesses of BOC and Air Liquide in Japan that began in
2003, as well as for the restructuring of the ISP business in the US following the disposal of the packaged gas business.
Europe Turnover
and adjusted operating profit increased further in 2004. Manufacturing activity
continued to decline in the UK but BOC maintained a strong position in the market.
Improved service levels enabled selling price increases to be implemented. At
the same time costs were reduced through improved productivity.
Modest increases in industrial product sales were helped by rejuvenation of retail outlets in the UK. Medical product sales increased as a result of gaining
additional National Health Service business and continued demand for lightweight oxygen cylinders. The range of lightweight cylinders will be expanded by introducing additional sizes during 2005.
The
new business supplying helium to Oxford Magnet Technology for medical imaging
devices began in 2003 and performed well throughout 2004. It was also the first
full year of the refrigerant reclaim service in the UK, based on an exclusive
global licence with Hudson Technologies. A range of gases for scientific applications
was introduced during the year and some additional sales were generated
following the launch of a mail order catalogue for gases and related products.
BOCs Sureflow beverage dispense gas operation was expanded by new business
for Heineken outlets in Ireland during 2004.
BOCs business in Poland was enlarged from February 2003 with the acquisition of Praxairs
Polish business. 2004 was therefore the first full year of the expanded business
and there were further integration benefits.
North America The
BOC Group announced on 27 January 2004 that it had signed a letter of intent
to sell its US packaged gas business to Airgas. This business had turnover of
approximately US$240 million in 2003. The disposal was completed on 30 July 2004
upon receipt of initial cash proceeds of US$175 million.
Following this transaction, the ISP business in north America consists of bulk medical gases, bulk supplies to distributors, tube trailer and liquefied
helium in the US as well as the Canadian packaged gas business. In total these elements currently generate turnover of some US$450 million a year.
The impending disposal of the US packaged gas business created a challenging business environment for a significant part of the year. US sales volumes and
adjusted operating profit were lower in the period prior to the disposal.
Turnover increased in Canada principally as a result of the acquisition of Air Products Canadian gases and related products business with effect from April
2003. Cost synergies arising from the integration further boosted adjusted operating profit in 2004.
Latin America Turnover
increased significantly and margins improved. Growth across the region was driven
principally by sales of medical products supplemented by sales of BOC-branded
cutting and welding equipment. Sales of packaged chemicals increased in Colombia
and Venezuela.
Results
improved strongly in Venezuela, despite a continuation of political unrest. BOCs
associated company achieved better results in Chile but there was a sharper improvement
in Argentina.
Selling price increases offset inflation in Venezuela and Chile but the trends were less favourable in Colombia during 2004. A new customer service centre was
opened in Venezuela and new business systems were successfully implemented in Venezuela and Colombia during the year.
Africa Important sections of South African industry were depressed during 2004 because of the stronger currency. Rand
exchange rates reduced the profitability of gold mining and manufacturing for export in particular. At the same time the cost of imported goods was lowered making them more competitive with those manufactured locally. However lower interest rates
began to stimulate domestic consumption towards the end of the year.
Despite the more difficult market conditions, adjusted operating profit improved significantly on the basis of a modest improvement in turnover. Margins
improved as a result of better productivity and operating efficiency, partly offset by increased transport costs arising from the temporary shutdown of some key supplier facilities. Sales of cutting and welding products increased in South Africa and
so did both the sales volume and the turnover of liquefied petroleum gas (LPG). Turnover of special products, including refrigerants, grew particularly rapidly.
Export
sales of welding products manufactured by Afrox, BOCs South African subsidiary,
also increased significantly. There was a modest improvement in adjusted operating
profit despite the currency disadvantage. Sales of the AfroxPac emergency oxygen
kit for underground miners were substantially lower in 2004 as order intake reflected
weak activity in the gold mining sector.
A
programme to renovate the Afrox retail network in South Africa with the development
of a number of Gas & Gear outlets and a range of safety
products is under way. In addition a range of diving gases and a fire suppression
product have been launched in South Africa.
Good progress was made in growing both turnover and adjusted operating profit in the other southern African countries during 2004. A new carbon dioxide plant
supported growth in Nigeria.
Japan The basis of accounting for BOCs business in Japan changed during 2003 as a result of a merger. Full details can be seen in the PGS section on page 49. In 2004 ISPs turnover in Japan was slightly less than the previous year but adjusted operating profit was higher through cost savings following the merger and from some asset disposals.
52 | The BOC Group plc Annual report and accounts 2005 | Operating review (comparing 2004 with 2003) |
South and South East
Asia These
regions came under the same business unit management during 2004. In aggregate
there were modest improvements in both turnover and adjusted operating profit.
In Taiwan, buoyant activity in manufacturing and infrastructure development was
reflected in higher turnover and adjusted operating profit. There were also sharply
better results
from the industrial products business in Thailand but ammonia margins were under
strong competitive pressure and liquefied petroleum gas (LPG) selling prices
remained subject to restrictive regulation. Hong Kong continued to be affected
by the migration of manufacturing to mainland China and in Singapore shipbuilding
and construction activity failed to improve in 2004. Competition intensified
in the Malaysian market for industrial gases. Demand for helium was strong throughout
Asia.
In south Asia, turnover increased and adjusted operating profit was further boosted by an asset disposal. Trading conditions in Bangladesh were adversely
affected by a combination of political uncertainty, strikes and floods.
South Pacific Turnover
and adjusted operating profit increased in 2004 and margins were improved by
holding down costs. The economic environment remained favourable across the region.
Manufacturing activity was buoyant in Australia despite a challenging environment
for export-oriented manufacturers created by the stronger currency. New projects
in the oil and gas sector
and in mining generated increased demand for welding and safety products. During
2004 BOC secured major contracts with Western Mining to meet its requirements
for safety products across Australia.
The
economy also continued to grow in New Zealand but somewhat less rapidly than
in Australia. There was also an improvement in the Pacific Islands, while gold
mining activity and oil refining investment led to increased business in Papua
New Guinea.
Major
initiatives in 2004 included an agreement with the Australian CSIRO to commercialise
ethanedinitrile, a gas that can be used to sterilise soil and timber, and which
management believes has significant potential. The acquisition of OccCorp, an
injury management provider, gives BOC entry to a largely untapped market by combining
BOCs safety services and products.
A
dedicated refrigerant reclaim fleet was established to help customers comply
with new refrigeration regulations that make it mandatory to recover, return
and safely dispose of hydrofluorocarbons. BOCs new Heliox gas mixture,
which helps the treatment of patients with airway obstructions, and Inhalo, the
new lightweight cylinder, were both successfully launched into the medical market.
BOC
commenced an extensive redevelopment program of its Gas & Gear stores, supporting
traditional industrial customers and new customers alike, giving a stronger retail
position, providing better visibility, higher traffic flow, attractive merchandising
and design.
The
price of liquefied petroleum gas (LPG) was particularly volatile during 2004.
BOCs associated company in Australia, Elgas, was notably successful
in preserving sales margins in these difficult circumstances and adjusted operating
profit was increased. Elgas expanded through the acquisition of a leisure gas
business during the year. The potential impact of Government plans to remove
an excise tax exemption for automobile gas in the period from 2008 to 2012 was
softened by a subsequent decision to delay the introduction by three years and
by an agreement to provide capital allowances to encourage car owners to convert
their vehicles to
use LPG fuel. Automobile gas is a minor part of Elgas turnover.
BOC Edwards | |||||||
Change | |||||||
on 20031 | |||||||
2004 | Change | (constant | |||||
£ million | on 2003 | currency) | |||||
Turnover | 816.5 | +19 | % | +27 | % | ||
Operating profit | 46.8 | +492 | % | +588 | % | ||
Adjusted operating profit2 | 47.8 | +158 | % | +181 | % | ||
1. | A reconciliation of results for 2003 at 2003 and at 2004 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
Operating exceptional items in 2004 were for the integration of the industrial and medical gases businesses of BOC and Air Liquide in Japan that began in 2003.
Conditions
improved in most of BOC Edwards key markets during 2004. Orders for semiconductor
equipment began to pick up in the first quarter leading to increased sales in
subsequent quarters. At the same time a major expansion of liquid crystal display
(flat panel) manufacturing facilities got under way. This provided fresh business
opportunities for both gases and equipment. Sales of chemical
management equipment for new semiconductor fabrication plants improved only slightly
and profitability continued to be affected by competitive market conditions.
Demand for scientific equipment vacuum systems and for pharmaceutical packaging
machines was better in 2004 but sales of vacuum systems for aerospace metallurgy
applications remained at a low level.
At the beginning of 2004, high levels of capacity utilisation encouraged a number of semiconductor manufacturers to add fresh capacity or upgrade existing
facilities. This led to increased orders, which were reflected in higher turnover and adjusted operating profit from the second quarter onwards.
BOC Edwards was successful in winning new equipment business with the majority of semiconductor fabrication facilities for which construction began in
2004. These included several investments in Taiwan, Korea, Japan, China, Europe and the US.
Operating review (comparing 2004 with 2003) | 53 | |
New pumping
and exhaust systems were introduced for semiconductor, flat panel display
and other vacuum applications. A new range of iGX pumps for the semiconductor
industry provides better control and monitoring capabilities and use less
power than before. BOC Edwards also launched high capacity pumps of its own
design and manufacture for flat panel applications. New turbomolecular and
scroll pumps were designed for scientific
instrumentation. Wet chemical abatement systems were introduced to expand and
complement the capabilities of BOC Edwards exhaust abatement systems.
Increased production of semiconductors was reflected in better demand for electronic materials. Production of nitrogen trifluoride was expanded further in 2004 to over 100 tonnes a year. New investments in semiconductor facilities also provided opportunities for nitrogen supply
contracts. BOC Edwards has become one of the leading suppliers of bulk gas to the growing semiconductor industry in China and continued to benefit from the expansion of semiconductor manufacturing in Taiwan, Japan and Singapore. New nitrogen
generators were installed at several customer sites and further capacity was added to satisfy growing demand from customers within the Hsinchu science park in Taiwan.
Accelerated
investment in new flat panel display production facilities led to significant
orders for large capacity pumping systems in both Taiwan and Korea. Gas supply
contracts were also signed with a number of display manufacturers in Taiwan and
Japan. Liquid crystal display production leads to substantial demand for chamber
cleaning chemicals. Onsite fluorine generation equipment is now installed at
a number of semiconductor and flat panel manufacturers. A full commercial-scale
generator is functioning at LG Philips new sixth generation plant in Korea.
Demand
for pharmaceutical freeze-drying and packaging equipment picked up in 2004 leading
to better sales and adjusted operating profit. A new non-contact check-weighing
machine was introduced. Nuclear magnetic resonance technology allows every package
to be checked, enables packing lines to operate at higher speeds and facilitates
immediate correction of any deviation from specification.
The
basis of accounting for BOCs gases business in Japan changed during 2003
as a result of a merger. Full details can be seen in the PGS section on page
49. Electronic gases turnover increased significantly in 2004 as a result of
the pick up in the semiconductor industry. The benefit of increased turnover
on gases adjusted operating profit was amplified by synergy benefits arising
from the
merger.
Contracts
were won in Asia and Europe furthering a strategy to expand the range of value-added
services to electronic manufacturers. These include gases management, chemicals
supply, support services and materials logistics. Other developments included
an improved offering of gases and vacuum systems for lithography and supercritical
carbon dioxide cleaning technology.
Afrox hospitals | ||||||||
2004 £ million |
Change on 2003 |
Change on 20031 (constant currency) |
||||||
Turnover | 432.1 | +22 | % | +9 | % | |||
Operating profit | 59.8 | +30 | % | +16 | % | |||
Adjusted operating profit2 | 59.8 | +30 | % | +16 | % | |||
1. | A reconciliation of results for 2003 at 2003 and at 2004 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
Adjusted operating
profit increased faster than turnover as a result of careful control of overhead
costs and positive pricing trends. Hospital occupancy rates remained similar
to a year ago. Acquisitions were a minor factor in the turnover increase. The
Lifecare chronic care facilities and Afrox occupational health services both
delivered a good performance in 2004.
The
change to a new reimbursement system that began during 2003 was completed in
2004. The previous system of paying health care providers a fee for their services
changed to a fixed payment for each kind of procedure as well as a per day tariff
structure.
54 | The BOC Group plc Annual report and accounts 2005 | Operating review (comparing 2004 with 2003) |
Gist | ||||||||
Change | ||||||||
on 20031 | ||||||||
2004 | Change | (constant | ||||||
£ million | on 2003 | currency) | ||||||
Turnover | 293.2 | no change | +1 | % | ||||
Operating profit | 25.1 | 14 | % | 14 | % | |||
Adjusted operating profit2 | 25.1 | 14 | % | 14 | % | |||
1. | A reconciliation of results for 2003 at 2003 and at 2004 rates of exchange is shown on page 40. |
2. | A reconciliation of adjusted operating profit with operating profit is shown on page 41. |
3. | All comments below are on a constant currency basis. |
The comparison
of turnover and adjusted operating profit between 2003 and 2004 is distorted
by a non-recurrent item during 2003. In 2003 a gain of some £4.1 million
arising
principally from the termination of operations for the Marks & Spencer General
Merchandise business was credited to adjusted operating profit. The termination
of this business also eliminated some £26 million of turnover in 2004 compared
with 2003. After adjusting for this item, underlying turnover grew principally
as a result of increased food business for Marks & Spencer, as well as new
contracts and the expansion of activity with Ocado and Carlsberg UK. On the same
basis,
adjusted operating profit in 2004 was at a similar level to 2003.
Primary food distribution operations were also expanded in 2004 when Gist took on the transport operations of John Rannoch foods, one of the leading
suppliers of poultry products to Marks & Spencer. Gist manages the complex supply chain for all of Marks & Spencers chilled and ambient foods. During 2004, a major investment was made to expand a chilled food facility in Kent to meet
the demands of the growing network of M&S Simply Food stores.
55 |
Financial review
Corporate transactions and restructuring
In
South Africa the disposal of Afrox Healthcare Limited to a consortium lead by
two major black empowerment investors was completed on 22 March 2005. African
Oxygen Limited, BOCs
subsidiary in South Africa, retains a significant interest in the hospitals business
through a 20 per cent holding in the new company. The gain on disposal of £84.9
million has been recognised as an exceptional item. African Oxygen Limited has
distributed the proceeds of the disposal to its shareholders through a buy back
of shares and a special dividend. The amount of the special dividend payable
to
minority shareholders was some £54
million, which is included in the total dividends paid to minorities in subsidiaries
within the Group cash flow statement.
The
sale of BOCs packaged gas business in the US to Airgas Inc was completed
in July 2004. Part of the consideration was payable subject to certain conditions
and accordingly was not recognised in 2004. This remaining consideration amounting
to US$20 million was received in November 2005 and has been recognised in 2005
as an exceptional item. The disposal of the business in 2004 resulted in a
loss of £79.5 million plus associated restructuring costs of £14.8
million.
In
2005 £20.7 million has been charged for restructuring in BOC Edwards. This
comprises £13.9 million of goodwill impairment and severance costs.
Savings of approximately £5 million are targeted from this restructuring
during 2006. Further costs are anticipated from this programme in 2006 leading
to additional benefits.
Group
expenditure on acquisitions of businesses was £57.1 million (2004: £50.9
million). The main acquisitions during 2005 were G Van Dongen Holding BV, to
expand Gists primary business into Europe, and an additional equity investment
in Compania de Nitrogeno de Cantarell (CNC) in proportion to BOCs existing
65 per cent equity holding. The main acquisition in 2004 was to
increase BOCs holding in CNC.
Financial indicators
The
trends of financial indicators which, taken together, are a measure of the performance
and efficiency of the Groups finance and tax structures, are:
2005 | 2004 | 2003 | |||||
Interest cover (times)1 | 7.1 | 6.3 | 4.6 | ||||
Adjusted interest cover (times)2 | 7.4 | 6.5 | 5.3 | ||||
Net debt/equity (%) | 40.9 | 51.2 | 73.4 | ||||
Net debt/capital employed (%) | 25.6 | 29.9 | 37.4 | ||||
Group tax rate (%) | 26.9 | 24.7 | 27.4 | ||||
Adjusted Group tax rate (%)3 | 26.0 | 29.0 | 29.0 | ||||
Adjusted means excluding exceptional items. | |
1. | Interest on net debt covered by operating profit. |
2. | Interest on net debt covered by adjusted operating profit. |
3. | The adjusted tax charge expressed as a percentage of adjusted profit before tax. |
The ratios are commented on below in the appropriate section. | |
Liquidity and capital resources | |
Cash flows The Groups cash flows from operating, investing and financing activities, as reflected in the Group cash flow statement on page 88, are summarised in the following table: |
2005 £ million |
2004 £ million |
2003 £ million |
|||||
Net cash inflow from operating activities | 665.5 | 758.5 | 700.1 | ||||
Dividends from joint ventures and associates | 51.1 | 79.1 | 35.0 | ||||
Returns on investment and servicing of finance | (131.6 | ) | (91.2 | ) | (94.4 | ) | |
Tax paid | (118.4 | ) | (98.2 | ) | (90.7 | ) | |
Total provided by operating activities | 466.6 | 648.2 | 550.0 | ||||
Capital expenditure and financial investment | (299.7 | ) | (204.2 | ) | (227.0 | ) | |
Acquisitions and disposals | 128.8 | 92.5 | (118.3 | ) | |||
Total used by investing activities | (170.9 | ) | (111.7 | ) | (345.3 | ) | |
Decreases in debt | (165.7 | ) | (180.7 | ) | (128.7 | ) | |
Shares issued | 9.6 | 12.4 | (2.6 | ) | |||
Equity dividends paid | (204.1 | ) | (197.3 | ) | (192.1 | ) | |
Net sales/(purchases) of short-term investments | 14.3 | (20.8 | ) | 16.2 | |||
Total used for financing activities | (345.9 | ) | (386.4 | ) | (307.2 | ) | |
(Decrease)/increase in cash | (50.2 | ) | 150.1 | (102.5 | ) | ||
56 | The BOC Group plc Annual report and accounts 2005 | Financial review |
Cash flow from operations Total cash generated by operating activities in 2005 was £466.6 million compared to £648.2 million in 2004.The decrease was associated with a lower net cash inflow from operating activities of £665.5 million (2004: £758.5 million) primarily as a result of an approximate £70 million impact of the disposal of the Afrox hospitals business part way through the year. Returns on investment and servicing of finance increased significantly in 2005 compared with 2004.The 2005 total included approximately £54 million for the minority interest element of the special dividend paid by African Oxygen Limited following the disposal of its majority shareholding in Afrox Healthcare Limited in March 2005. The 2005 tax paid includes approximately £15 million in connection with this transaction. In 2004, the increase in cash provided by operating activities to £648.2 million (2003: £550.0 million) was driven by higher operating profit before exceptional items of £576.9 million in 2004 (2003: £505.6 million) and improved working capital management offsetting the impact of higher contributions to the UK pension scheme. Higher dividends from joint ventures and associates in 2004 of £79.1 million (2003: £35.0 million), which included a second dividend from Japan Air Gases, also helped to improve cash flows.
Investing Cash used by investing activities was £170.9 million in 2005 (2004: £111.7 million).The increase in capital expenditure and financial investment over the prior year reflects a higher level of expenditure in new supply scheme projects, principally in Asia/Pacific and the Americas.The higher net cash inflow from acquisitions and disposals in 2005 reflects the proceeds from the sale by African Oxygen Limited of its majority shareholding in Afrox Healthcare Limited in March 2005. In 2004, the reduction in cash used by investing activities to £111.7 million (2003: £345.3 million) reflected a lower level of expenditure on acquisitions in 2004 compared to 2003, proceeds from the divestment of the US packaged gas business in July 2004 and receipts of £53.0 million from capital restructuring of Japan Air Gases Ltd.
Financing Overall, net debt decreased by £122.7 million as a result of a net cash inflow of £91.6 million, a
£9.6 million inflow from the issue of shares, an inflow of £34.7 million for the net debt acquired/disposed on business acquisitions and disposals and £(13.2) million for the effect of exchange rate and inception of finance leases.
Decreases in debt in 2005 principally relate to the repayment of £168.6 million of medium term notes. In 2004, net debt decreased by £405.7 million as a result of a net cash inflow of £339.2 million, a £12.4 million inflow
from the issue of shares, an outflow of £4.7 million for the net debt acquired/disposed on business acquisitions and disposals and £58.8 million for the effect of exchange rate and other movements. Decreases in debt in 2004 principally
related to the repayment of £125.0 million of 6.75% bonds due in 2004 and £42.6 million net repayment of commercial paper.
The Group has access to a range of funding. Debt
finance is raised by issuing bonds, commercial paper, other obligations to investors
and through borrowings
from banks.
As
well as medium and long-term borrowings, the Group maintains short-term borrowings,
principally in the form of commercial paper and bank borrowings. At 30 September
2005, the Group had US$450 million (£254 million) of committed multi-currency
facilities with a group of relationship banks maturing in 2008. In October 2005
these facilities were replaced with US$600 million (£339
million) of committed multi-currency facilities maturing in 2010. These facilities
provide back-up for the issue of commercial paper as well as general liquidity
for the Group. Additional committed facilities are maintained by the principal
operating units in the
Group.
At 30 September 2005, the gearing ratio (net debt
including finance leases as a percentage of capital employed) was 25.6 per cent
compared with 29.9 per cent in 2004 and 37.4 per cent in 2003. The net debt/equity
ratio was 40.9 per cent, compared with 51.2 per cent in 2004 and 73.4 per cent
in 2003.
The Group has access to a diverse range of debt
finance including commercial paper, public bonds and bank borrowings which, it
believes, will be available to meet long-term financing needs. The Group has
sufficient facilities to cover likely borrowing needs. Management anticipates
that capital
expenditure in 2006 will be at a higher level than in 2005 and will be covered
by cash inflow from operating
activities and existing sources of financing.
Management of financial risks
The
board of directors sets the treasury policies and objectives of the Group which
include controls over the procedures used to manage currency, interest rate and
credit risk. The approach to managing risk is set out below. This approach is
expected to continue during the next financial year. On a day-to-day basis, Group
treasury carries out these policies, with regular review meetings with the Group
finance director.
Specific and significant activities need approval from the finance committee,
which includes any two directors of the company.
The Group
does not undertake any trading activity in financial instruments nor does
it enter into any leveraged derivative transactions.
Currency risk The
Group faces currency risk principally on its net assets, most of which are in
currencies other than sterling. Currency movements can therefore have a significant
effect on the Groups balance sheet when translating these foreign currency
assets into sterling. In order to reduce this effect the Group manages its borrowings,
where practicable
and cost effective, to hedge its foreign currency assets.
Where possible,
hedging is done using direct borrowings in the same currency as the assets
being hedged or through the use of other hedging methods such as currency
swaps. Group borrowings are currently held in a wide range of currencies
and, after swaps, 79 per cent of net debt (2004: 82 per cent) is denominated
in the principal currencies affecting the Group: US dollars, Australian
dollars, Japanese yen, South African rand and sterling.
The
aggregate of the notional principal values of currency swaps was £341.7
million (2004: £593.1 million) spread over a range of currencies. The
fair value of such swaps is included in note 21 b) i) to the financial statements.
Financial review | 57 |
The balance
sheets of overseas operations are translated into sterling at the closing
rates of exchange for the year and any exchange difference is dealt with
as a movement in reserves. This is explained more fully in the accounting
policy note on page 91. The profit and loss accounts of overseas businesses
are translated at average rates of exchange and this translation impact directly
affects the profit and loss account
of the Group.
The
Group manages its currency flows to minimise currency transaction exchange risk
and forward contracts are used as appropriate to hedge net currency flows
and selected individual transactions. The Groups foreign exchange
cover is mainly managed in the UK, Australia, Japan and South Africa. The
UK manages the cover for exposures on net trade flows of the Groups
companies in the US and certain other countries. The aggregate principal
amount of forward cover outstanding at 30 September 2005 amounted to £222.6
million (2004: £224.4 million).
Interest rate risk At 30 September 2005, the Groups net debt position after interest rate hedging activity included a
net exposure of £36.6 million (2004: £74.6 million) to floating interest rates. Based on the Groups 2005 year end level and composition of net debt, an increase in average interest rates of one per cent per annum would result in a
decrease in future earnings, before tax, of £0.4 million per annum (2004: £0.7 million).
In order
to manage interest rate risk the Group maintains both floating rate and
fixed rate debt. At
30 September 2005, there was a 4:96 ratio (2004: 8:92) between floating and
fixed rate net debt. Underlying borrowings are arranged on both a fixed rate
and a floating rate basis and, where appropriate, the Group uses interest
rate swaps to vary this mix and to manage the Groups interest rate exposure.
At
30 September 2005, the aggregate of the notional principal values of swap agreements
which affect the floating rate/fixed rate mix was £286.4 million
(2004: £285.3 million). The fair value of such swaps is included
in note 21 b) i) to the financial statements.
Foreign exchange risk At
30 September 2005, the Group had outstanding forward exchange contracts totalling £222.6
million (2004: £224.4 million) in respect of its actual and forecast transaction
exposures. The fair value of these contracts at 30 September 2005 amounted to
a gain of £0.2 million (2004: a gain of £7.5 million). A ten per
cent
appreciation of sterling would increase the fair value of these contracts by £15.2
million (2004: £11.0 million).
In
addition to these forward contracts, the Group is exposed to foreign exchange
movements
on its net debt position. At 30 September 2005 net debt, after currency
swaps, comprised net sterling liabilities of £153.2 million (2004: £104.6
million) and net currency liabilities of £686.5 million (2004: £857.8
million). Based on the Groups 2005 year end level and composition
of net debt, a ten per cent appreciation of sterling would result in a
reduction in the value of net currency liabilities of £62.4 million
(2004: £78.0 million).
Counterparty risk Cash
deposits and other financial instruments give rise to credit risk on the amounts
due from counterparties. Credit risk is managed by limiting the aggregate amount
and duration of exposure to any one counterparty depending upon its credit rating
and by regular reviews of these ratings. The possibility of material loss arising
in the event
of non-performance by a counterparty is considered unlikely by management.
The
currency and interest rate hedging profile of the Groups borrowings at
30 September 2005 is shown in note 21 to the financial statements. Further
information on financial risk management is also given in note 21 to the
financial statements.
Interest on net debt
The
net charge before the Groups share of interest of joint ventures and associates
was £47.6 million in 2005 (2004: £70.5 million, 2003: £75.8
million), which, after excluding interest income from loans to joint ventures
and associates, represented 7.2 per cent of average net borrowings during the
year. After taking into account interest capitalised of £1.1 million (2004: £0.1
million, 2003:
£0.8 million) and the Groups share of the net interest of joint ventures
and associates of £29.1 million (2004: £17.9 million, 2003: £20.3
million), the net charge was £76.7
million. Adjusted interest cover (the number of times that the interest charge
on net debt is covered by adjusted operating profit) increased to 7.4 times (2004:
6.5 times, 2003: 5.3 times).
Net interest on pension financing items
The
interest on pension scheme liabilities was £128.9 million in 2005 (2004: £117.4 million, 2003: £110.2 million). The expected return on pension scheme assets was
£147.1 million in 2005 (2004: £133.2 million, 2003: £119.6 million).The increase in the expected return on scheme assets was a result of the increased value of the Groups
pension assets.This reflects the increase in the value of world equity markets
and the impact of the additional cash contributions made by the Group to the
UK pension scheme.
Debt maturity profile | ||||||||
The maturity profile of the commitments relating to the Groups gross borrowings and the estimated associated interest cost, if the debt runs to the full term, is as follows: | ||||||||
2005 | 2004 | |||||||
Principal | Interest | Principal | Interest | |||||
£ million | £ million | £ million | £ million | |||||
More than five years | 303.9 | 82.7 | 320.5 | 111.2 | ||||
Three to five years | 202.2 | 58.0 | 260.9 | 76.6 | ||||
One to three years | 265.4 | 82.4 | 347.1 | 93.9 | ||||
Within one year | 259.2 | 52.7 | 262.1 | 64.6 | ||||
Total | 1,030.7 | 275.8 | 1,190.6 | 346.3 | ||||
58 | The BOC Group plc Annual report and accounts 2005 | Financial review |
At 30 September 2005, the Group had US$450 million (£254 million) of committed multi-currency facilities with a group of relationship banks maturing in 2008. In October 2005 these
facilities were replaced with US$600 million (£339 million) of committed multi-currency facilities maturing in 2010.These facilities provide back-up for the issue of commercial paper as well as general liquidity for the Group.Additional
committed facilities are maintained by the principal operating units in the Group.
Additional
information on the Groups gross borrowings can be found in note 20.
Details of the Groups share of net debt of joint ventures and associates,
the majority of which is non-recourse, are given in note 13 a).
Other contractual obligations | ||||||||
The maturity of other contractual obligations of the Group is as follows: | ||||||||
Other creditors | Total other | |||||||
(excluding | Unconditional | contractual | ||||||
deferred | Operating | purchase | cash | |||||
income) | leases | obligations | obligations | |||||
£ million | £ million | £ million | £ million | |||||
More than five years | 3.0 | 59.9 | 371.2 | 434.1 | ||||
Three to five years | 10.7 | 25.9 | 116.9 | 153.5 | ||||
One to three years | 5.2 | 49.1 | 137.0 | 191.3 | ||||
Within one year | 872.3 | 40.6 | 71.4 | 984.3 | ||||
Total | 891.2 | 175.5 | 696.5 | 1,763.2 | ||||
See also note 25 to the financial statements for further information on operating leases and unconditional purchase obligations. |
Off-balance sheet arrangements
The
Group has provided guarantees of £49.3 million to third parties at 30 September
2005 as shown in note 26 a) to the financial statements. The guarantees include
performance bonds in the Cantarell joint venture, a guarantee of the borrowings
of a joint venture in China and other guarantees provided in the ordinary course
of business. Other than disclosed, there are no off-balance sheet arrangements
that have or are reasonably
likely to have a current or future material effect on the Groups financial
condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Taxation
The
tax charge on profit before exceptional items for 2005 of £131.5 million
is calculated in accordance with UK accounting standards, including FRS19 (deferred
tax), under which
full provision is made for deferred taxes.
The
effective tax rate on adjusted profit in 2005 was 26 per cent (2004: 29 per cent,
2003: 29 per cent). The main reason for the reduction in the tax rate was
the resolution of various matters with the US tax authorities, including
the utilisation of tax losses.The total tax rate in 2005 was 26.9 per cent
(2004: 24.7 per cent, 2003: 27.4 per cent).The Group pays corporation tax
in the UK at a rate of 30 per cent. Additional information on tax rates
is shown in note 4 to the financial statements.
The
Group is currently liable to pay federal tax at the rate of 35 per cent in the
US. This is reduced by the existence of tax credits. In the other principal
subsidiaries, the tax rate is typically between 29 per cent and 42 per
cent.
Contingencies
The
Group monitors all contingent liabilities including matters relating to litigation
and the environment via a process of consultation and evaluation which includes
senior management, internal and external legal advisers and internal and external
technical advisers. This process results in conclusions with respect to potential
exposure and provisions are made or adjusted accordingly. Management believes
that the Group has
adequately provided for contingencies which are likely to become payable in the
future.
Legal proceedings
BOC Group companies are parties to various legal proceedings in the ordinary course of business, including some in which claims for damages in large amounts have been asserted.
The
outcome of litigation to which BOC Group companies are party cannot be readily
foreseen, but the directors believe that such litigation should be disposed
of without material adverse effect on the Groups financial condition
or profitability.
Welding fumes litigation A US subsidiary of BOC,The BOC Group, Inc., currently is party to a number of lawsuits in the US for alleged injuries resulting from exposure to manganese, asbestos and/or toxic fumes in connection with the welding process. The BOC Group, Inc. has not manufactured welding rods in the US since 1986 when the welding electrodes business was sold. The BOC Group, Inc. ceased selling welding rods in the US manufactured by others when the sale of the US packaged gas business, including the operations that distributed packaged gases and welding equipment, was completed in July 2004.
Financial review | 59 |
|
Manganese litigation At 30 September 2005, there were a total of approximately 8,574 claimants (Total Claimants) in pending manganese related cases in both US federal and state courts that name The BOC Group, Inc. as a defendant, a net decrease of approximately 1,100 claimants from 30 September 2004. The BOC Group, Inc. is typically one of several defendants in these cases that claim compensatory and punitive damages, in most cases for unspecified amounts, for alleged neurological injury, including Parkinsons disease, through exposure to manganese in welding fumes. Of the Total Claimants, approximately 4,607 claimants have filed in, or been transferred for pre-trial purposes to, the federal district court in the Northern District of Ohio, where a multi-district litigation (MDL) proceeding has been commenced, and approximately 50 claimants are in process to be transferred to or from the MDL. The MDL proceeding is a vehicle for coordinating pre-trial proceedings in cases pending in different federal district courts in the US. It is currently contemplated that the MDL court will try three cases during the MDL proceeding. The first such case is currently scheduled for February 2006. In addition to the cases in federal court,The BOC Group, Inc. is a defendant in a number of similar cases pending in state courts, which are in different stages of procedural development, and certain cases are scheduled for trial from time to time. The BOC Group, Inc. has been a co-defendant in other manganese related claims that have been resolved as follows. From 1 January 1997 to 30 September 2005, 3,965 claims were dismissed. Through 30 September 2005, seven cases were tried to final jury verdicts in favour of the defendants, including The BOC Group, Inc., and one case was tried to a final jury verdict in favour of the plaintiffs, which is being appealed.
Asbestos litigation At 30 September 2005, there were a total of approximately 15,966 claimants in pending asbestos related cases that name The BOC Group, Inc. as a defendant, a net decrease of approximately 600 from 30 September 2004. The BOC Group, Inc. is typically one of a large number of defendants in these cases that claim compensatory and punitive damages, in most cases for unspecified amounts, for alleged injuries, including cancer, through exposure to asbestos in welding fumes or from welding consumables. A very small number of these claimants allege injuries from exposure to asbestos in non-welding rod products and premises. The BOC Group, Inc. has been a co-defendant in other asbestos related claims that have been resolved as follows. From 1 January 1997 to 30 September 2005, 11,776 claims were dismissed and 75 claims were dismissed on summary judgments. Through 30 September 2005, nine cases were tried to final jury verdicts in favour of the defendants, including The BOC Group, Inc., and one case was tried to a final jury verdict in favour of the plaintiffs, which is being appealed.
The BOC Group, Inc. believes that it has strong defences to the claims asserted in all of the various manganese and asbestos related cases and intends to defend vigorously such claims. In the manganese related claims,The BOC Group, Inc. believes that recent relevant scientific literature, based on epidemiological studies, strongly supports its defence of such claims. Based on its experience to date, together with its current assessment of the merits of the claims being asserted and applicable insurance, BOC believes that continued defence and resolution of the welding fumes litigation will not have a material adverse effect on its financial condition or profitability and no provision has been made. Nonetheless, it is not possible to predict either the number of future claims or the number of claimants that any future claims may present. In addition, the outcome of welding fume cases, either involving BOC or other defendants, is inherently uncertain and always difficult to predict, and BOC cannot provide any assurances that any future resolutions of these types of claims will necessarily be consistent with its experience to date. In the event of an adverse outcome to any of the proceedings, a liability would be recognised if it was considered likely that it would give rise to an outflow of future economic benefits. Where there is applicable insurance, this would be recognised when its recoverability was virtually certain.
Fluorogas litigation In
February 2003, the company was notified that a jury verdict in the US District
Court for the Western District of Texas (the District Court) was obtained for
US$132 million against Fluorogas Limited, The BOC Group, Inc. and The BOC Group
plc. The verdict arose primarily out of an alleged breach of a memorandum of understanding
by Fluorogas Limited
before it was acquired by The BOC Group plc in September 2001. In March 2003,
the court also awarded interest and costs against the defendants, making them
jointly and severally liable for a total of US$174 million. A bond for the full
amount was
posted with the District Court as part of the normal appeals process.
In August 2004, the appellate court reversed the entire judgement against the BOC entities and all but US$170,000 in reliance damages against Fluorogas
Limited. In addition, the appellate court remanded for reconsideration by the District Court an award of attorneys fees on the US$170,000 recovery.
Fluorogas Limited was placed in administration under the Insolvency Act of 1986 pursuant to an order of an English Court. In January 2005 the parties
resolved the outstanding matters to their satisfaction. The appeal bond was released and Fluorogas Limited applied for, and received, a discharge from the administration order.
Insurance
Operational management is responsible for managing business risks. Several Group departments advise management on different aspects of risk and monitor results. Insurance cover is held
against major catastrophes. For any such event, the Group will bear an initial cost before external cover begins.
60 | The BOC Group plc Annual report and accounts 2005 | Financial review |
Inflation
Over the last three years, inflation has not had a material impact on the revenue or profit of the Group.
Critical accounting policies
The principal accounting policies affecting the results of operations and financial condition are set out on pages 91 and 92 of the financial statements. The application of certain of
these policies requires assumptions or subjective judgements by management. Management bases these on a combination of past experience and any other evidence that is relevant to the particular circumstances.
The
application of these assumptions and judgements affects the reported amounts
of profit during the year and the assets and liabilities at the balance sheet
date. Actual results may differ from the estimates calculated using these assumptions
and judgements. Management believes that the following are the critical policies
where the assumptions and judgements made could have a significant impact on
the consolidated financial statements.
Tangible fixed assets A significant part of the capital employed of the Group, particularly in the Process Gas Solutions and
Industrial and Special Products lines of business, is invested in tangible fixed assets. The nature of the business demands significant capital investment to renew or increase production capacity or to enable the business to achieve greater
productivity and efficiency.
It
is the Groups policy to depreciate tangible fixed assets, except land,
on a straight line basis over the effective lives of the assets.This ensures
that there is an appropriate matching of the revenue earned with the capital
costs of production and delivery of goods and services. A key element of this
policy is the estimate of the effective life applied to each category of fixed
assets which, in
turn, determines the annual depreciation charge. In deciding the appropriate
lives to be applied, management takes into account various factors including,
among other things, the accumulated experience of the effective asset lives from
historic business operations and an assessment of the likely impact of any changes
in technology.
While
Group earnings in any period would fluctuate if different asset lives were applied,
in some cases the original estimated life of an asset is closely related to
contractual arrangements with large customers. Some of the earnings impact of
choosing a different asset life would be mitigated, as the different life may
reflect different contractual arrangements with such customers. Nevertheless,
variations in the effective lives could impact the earnings of the business through
an increase or decrease in the depreciation charge. It is estimated that a change
of one year in the effective life of all plant, machinery, vehicles and cylinders
would have an impact of between £15 million and £20 million on annual
Group operating profit. A change in the effective life of buildings would have
only a negligible impact.
Intangible fixed assets In a similar manner to tangible fixed assets, management uses its judgement to determine the extent
to which goodwill arising from the acquisition of a business has a value that will benefit the performance of the Group over future periods. It is the Groups policy to amortise goodwill on a straight line basis over its useful economic
life.This takes into account, among other things, the maturity of the business acquired and its product and customer base. Any change in these assumptions would have an impact on the earnings of the Group.
It is estimated that a change of one year in the useful economic life of all goodwill would have an impact of approximately £1 million on annual Group
operating profit.
Retirement benefits Results
of the Group include costs relating to the provision of retirement benefits for
employees. It is
the directors responsibility to set the assumptions used in determining
the key elements of the costs of meeting such future obligations. The assumptions
are based on actual historical experience and are set after consultation with
the
Groups actuaries. They include the assumptions used for regular service
costs and for the financing elements related to the pension schemes assets
and liabilities. Whilst management believes that the assumptions used are appropriate,
a change in the assumptions used would affect both the operating profit and
net interest cost of the Group.
There
are a number of elements used in the assumptions and these vary for the different
countries in which the Group operates. There may also be an inter-dependency
between some of the assumptions, making it potentially misleading to consider
any approximate impact on Group results of a change in any one assumption in
isolation. Nevertheless, for the UK and US schemes together, it is estimated
that an absolute 0.25 per cent change in the assumptions on rates of inflation,
discount rates and return on equities in pension scheme assets would individually
result in changes of approximately £6 million, £3 million and £3
million respectively in the total pension cost in annual Group profit before
tax. A similar change in the assumptions on all other schemes would have only
a negligible impact.
Environmental provisions In certain parts of the business, mainly in the US, the Group has obligations to carry out
environmental clean-ups at former and current production sites. Many of these obligations will not arise for a number of years, and the costs are difficult to predict accurately. Management uses its judgement and experience to provide an appropriate
amount for the likely cost of such clean-ups, and the amounts, if material, are discounted to present values. Both the amount of anticipated costs, and the interest rates used to discount such costs, are subjective. The use of different assumptions
would impact the earnings of the Group.
It is estimated that a change of one per cent in the interest rate used to discount such costs would have an impact of approximately £1 million on
annual Group profit before tax.
Financial review | 61
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Current asset provisions In
the course of normal trading activities, management uses its judgement in establishing
the net
realisable value of various elements of working capital principally stocks,
work-in-progress and accounts receivable. Provisions are established for obsolete
or slow moving stocks, bad or doubtful debts and product warranties. Actual costs
in future periods may be different from the provisions established and any such
differences would affect future earnings of the Group.
The provisions are established at levels appropriate to the circumstances within individual Group business units, and not on a Group-wide systematic basis.
It is therefore considered that any estimate of the impact on annual Group operating profit of any change in such provisions may not be meaningful. Nevertheless, a change of ten per cent in the level of provision for bad and doubtful debts at 30
September 2005 would have an impact of approximately £3 million on annual Group operating profit.
The areas covered by critical accounting policies under UK GAAP do not materially differ from those under US GAAP. Further details of the differences between
UK and US GAAP are given in note 30 to the financial statements.
Accounting
The Groups
accounting policies are based on accounting principles generally accepted in
the UK (UK GAAP). During the year, the following new UK standards were issued:
FRS22 Earnings per share
FRS23 The
effects of changes in foreign exchange rates
FRS24 Financial reporting
in hyperinflationary economies
FRS25 Financial instruments: Disclosure
and
presentation
FRS26 Financial instruments: Measurement
FRS27 Life
assurance
FRS28 Corresponding amounts
RS1 Operating
and financial review
None of these standards are effective for the Group for the financial year ended 30 September 2005. The accounts for the financial year ended 30 September 2005 have therefore been prepared on an accounting basis consistent with that applied in the financial year ended 30 September 2004. With effect from 1 October 2005 the Groups accounting policies will be based on International Financial Reporting Standards, as outlined in the following section.
International Financial Reporting Standards
In accordance with
EU legislation, the Group is required to adopt International Financial Reporting
Standards (IFRS) in accounting periods commencing on or after 1 January 2005. Accordingly,
IFRS will first apply to the Groups financial statements for the financial
year commencing 1 October 2005. Results for the quarter ending 31 December 2005,
which will be announced in February 2006, will be presented on an IFRS basis.
In January 2006 the Group intends to present results for each quarter of the
financial year to 30 September 2005 restated on an IFRS basis.
The
Group established an IFRS project team in 2003.This is overseen by a formal steering
committee, which includes the Group finance director. There have been regular
reports on progress to the audit committee and executive management board. A
comprehensive training programme has been undertaken covering Group finance personnel
worldwide. The
Groups auditors have been kept informed of, and consulted
on, the development of the IFRS project and the preparation and implementation
of the new Group accounting policies.
The
Group is still in the process of finalising the full effects of adopting IFRS
but management is confident that all areas have been identified where significant
differences will arise between UK GAAP and IFRS. These areas are set out below.This
is based on the IFRS that are expected to be in effect for the year to 30 September
2006. However, it is possible that there could be further changes to
IFRS and interpretations prior to this date. The Group has elected to adopt early
the amendment to IAS19 as set out below, but does not currently intend to adopt
early any other IFRS or interpretations.
The principal differences which management expects to affect the Group are as follows: | |
a) | Goodwill. Under UK GAAP, goodwill is amortised over a period up to a maximum of 20 years. Under IFRS, goodwill is not amortised but instead is reviewed for impairment annually. |
b) | Share based payments. Under UK GAAP the cost of share options is calculated by reference to their intrinsic value, which means that there is no charge for options granted at the market price. Under IFRS, the Group will record a charge for the fair value of all share options including Save As You Earn schemes. |
c) | Taxation. Preliminary estimates indicate that the tax rate will be slightly higher under IFRS and the impact will be fully quantified as part of the restated results to be announced in January 2006. |
d) | Pensions. The Group has already adopted FRS 17 under UK GAAP. The equivalent IFRS is IAS 19 and the Group intends to adopt early the amendment to IAS 19 allowing for immediate recognition of actuarial gains and losses in a Statement of Recognised Income and Expense. Accordingly, the impact of accounting for pensions under IFRS will be similar, although not identical, to UK GAAP and as a result management does not expect a significant impact on earnings. There will be a difference in presentation in the balance sheet, and differences relating to the calculation of certain assets and liabilities. Under UK GAAP, net pension assets or liabilities are shown after deduction of the appropriate deferred tax. Under IFRS, net pension assets or liabilities are shown before the deduction of any deferred tax, which is then included with other deferred tax items. |
62 | The BOC Group plc Annual report and accounts 2005 | Financial review |
e) | Foreign exchange. There are certain differences in the requirements of IAS 21 compared to UK GAAP in respect of functional currencies and in relation to the accounting for foreign exchange on loans between Group companies. This is an area where there may be increased volatility in the Groups ongoing results on an IFRS basis compared to UK GAAP arising from exchange gains and losses. |
f) | Financial instruments. The Group will adopt IAS 39 on 1 October 2005 in line with the exemption under IFRS 1. This standard impacts the accounting for a range of financial instruments and embedded derivatives. The Group has few financial instruments and they are predominantly related to managing currency and interest rate risk. The Group has reviewed its financial instruments and has concluded that at present they meet the requirements to enable it to apply hedge accounting. Embedded derivatives typically arise from escalation clauses in contracts with customers to recover cost increases. Whilst the impact is not material at 1 October 2005, embedded derivatives may give rise to greater volatility in the Groups earnings arising from marking to market the underlying derivative. |
The
adoption of IFRS will also result in a number of changes to the presentation
of the
financial statements including disclosures. For example, the Groups share
of the post-tax profit arising in joint ventures and associates will be shown
as one line in the income statement rather than as part of Group turnover,
operating profit and interest. There will be a number of other presentational
changes including reclassifications
within the balance sheet and a change to the layout of the cash flow statement.
Overall, management believes that the impact of IFRS on earnings and net assets will be broadly neutral subject to the effects of IAS 21 and IAS 39 as noted
above. Cashflows and the underlying economics of the business will not change.
US GAAP
The financial statements of the Group have been prepared in accordance with UK GAAP, which differs in certain respects from US GAAP.
The
US accounting information in note 30 to the financial statements gives a summary
of the principal differences between the amounts determined in accordance with
the Groups accounting policies (based on UK GAAP) and amounts determined in accordance with US GAAP, together with the reconciliation of net profit and shareholders funds from a UK GAAP basis to a US GAAP basis and a
movement in shareholders funds on a US GAAP basis.
The
net income for the year ended 30 September 2005 under US GAAP was £326.7
million (2004:£297.7 million, 2003: £264.3 million), compared with the net profit of £367.0 million in 2005 (2004: £264.0 million, 2003: £219.1 million) under UK GAAP. Shareholders funds at 30 September 2005 under US GAAP were £2,122.2 million (2004: £1,920.1 million), compared with £1,942.0 million (2004: £1,675.3
million) under UK GAAP. The difference primarily results from the differing accounting
treatment of pensions, goodwill, financial instruments, investments, fixed asset
revaluations, deferred tax and variable interest entities.
Related party transactions
During the year,
interest income of £13.8 million (2004: £7.3 million, 2003: £7.6
million) was received from the Cantarell joint venture in Mexico.
During
the year, the Group was invoiced £45.9 million in respect of purchases
of production plants from Linde BOC Process Plants in the US.At 30 September
2005, £1.9 million was payable in respect of these invoices.
No material purchases were made in 2004 or 2003.
The
Group had no other material related party transactions that might reasonably
be expected to influence decisions made by the users of these
accounts.
Exchange rates
The majority of
the Groups operations are located outside the UK and operate in currencies
other than sterling.
The
effects of fluctuations in the relationship between the various currencies are
extremely complex and variations in any particular direction may not have a consistent
impact on the reported results. In terms of average rates for the year, in 2005
sterling strengthened against two of the four principal currencies affecting
the Group: by three per cent against the US dollar and by two per cent against
the Japanese yen. Sterling weakened by two per cent against the Australian dollar
and by three per cent against the South African rand.
In
2004, sterling strengthened against the US dollar and the Japanese yen. Sterling
weakened against the Australian dollar and the South African rand.
In
2003, sterling strengthened against the US dollar and the Japanese yen. Sterling
weakened against the Australian dollar and the South African rand.
Financial review | 63 |
The rates of exchange to sterling for the currencies which have principally affected the Groups results over the last five years were: | |||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||
US dollar | |||||||||||
At 30 September | 1.77 | 1.81 | 1.66 | 1.57 | 1.47 | ||||||
Average for the year | 1.85 | 1.79 | 1.60 | 1.47 | 1.44 | ||||||
Highest rate during year | 1.95 | 1.90 | 1.69 | 1.58 | 1.50 | ||||||
Lowest rate during year | 1.73 | 1.66 | 1.54 | 1.41 | 1.37 | ||||||
Australian dollar | |||||||||||
At 30 September | 2.32 | 2.50 | 2.45 | 2.89 | 2.98 | ||||||
Average for the year | 2.41 | 2.47 | 2.62 | 2.77 | 2.76 | ||||||
Highest rate during year | 2.56 | 2.68 | 2.89 | 3.00 | 3.03 | ||||||
Lowest rate during year | 2.27 | 2.33 | 2.40 | 2.54 | 2.62 | ||||||
Japanese yen | |||||||||||
At 30 September | 200.51 | 199.44 | 185.60 | 191.45 | 175.09 | ||||||
Average for the year | 198.20 | 195.17 | 191.01 | 184.34 | 170.04 | ||||||
Highest rate during year | 205.25 | 206.90 | 199.49 | 193.05 | 181.26 | ||||||
Lowest rate during year | 189.75 | 180.80 | 182.17 | 173.82 | 153.13 | ||||||
South African rand | |||||||||||
At 30 September | 11.25 | 11.72 | 11.57 | 16.58 | 13.24 | ||||||
Average for the year | 11.54 | 11.85 | 13.24 | 15.64 | 11.47 | ||||||
Highest rate during year | 12.46 | 13.33 | 16.41 | 19.49 | 13.26 | ||||||
Lowest rate during year | 10.77 | 10.75 | 11.40 | 13.00 | 10.54 | ||||||
The average for the year is an average of daily rates. On 12 November 2005, the latest practicable date for inclusion in this report and accounts, the rates of exchange to sterling for the principal currencies were as follows: US dollar 1.74; Australian dollar 2.38; Japanese yen 206.55; South African rand 11.75. |
The highest and lowest rates of exchange for sterling against the US dollar for the last six months were: | |||||||||||||
May | June | July | August | September | October | ||||||||
High | 1.90 | 1.84 | 1.77 | 1.81 | 1.84 | 1.79 | |||||||
Low | 1.82 | 1.79 | 1.73 | 1.77 | 1.76 | 1.75 | |||||||
Principal operating companies | |
The following operating companies principally affect the amount of profit or assets of the Group: | |
• | The BOC Group Inc., a wholly-owned Delaware corporation and a subsidiary of The BOC Group Inc., a wholly-owned Nevada corporation; |
• | BOC Limited, a wholly-owned English company; |
• | BOC Limited, a wholly-owned Australian company; |
• | Gist Limited, a wholly-owned English company; |
• | Japan Air Gases Ltd, a Japanese company, in which the Groups Japanese 99 per cent owned subsidiary holds 45 per cent; |
• | African Oxygen Limited, a South African company, in which the Groups shareholding is 56 per cent. |
Supplier payment policy
The Group applies
a policy of agreeing and clearly communicating the terms of payment as part of
the commercial arrangements negotiated with suppliers and then paying according
to those
terms. In addition the UK-based businesses have committed to the Better
Payment Practice Code.
A copy of the code can be obtained from the Department of Trade and Industry,
DTI Publications Orderline,Admail 528, London SW1W 8YT.
For UK businesses, of amounts owing to suppliers, trade creditors represents 58 days at 30 September 2005.
Going concern
The directors are
confident, after having made appropriate enquiries, that both the company and
the Group have adequate resources to continue in operation for the foreseeable
future. For this reason, they continue to adopt the going concern basis in preparing
the accounts. Management believes that its current credit facilities provide
sufficient working capital to meet the present requirements of its existing businesses
and that the
gearing ratio is appropriate given the nature of the Groups activities.
Substantial holdings
Details of substantial holdings of Ordinary shares at 12 November 2005 are shown on page 141.
64 | The BOC Group plc Annual report and accounts 2005 |
Corporate governance
The BOC Group is committed to business integrity, high ethical values and professionalism in all its activities. As an essential part of this commitment, the board supports the highest standards of corporate governance.
Combined Code on Corporate Governance
BOC has applied the principles contained in Section 1 of the Combined Code on Corporate Governance issued by the Financial Reporting Council and has complied throughout the year with the
provisions set out therein as they applied to the company.
US Sarbanes-Oxley Act of 2002
BOC has securities registered in the US and, as a result, is required to comply with the provisions of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) that apply to foreign private
issuers. Whilst the company already has a robust corporate governance framework in line with best practice under UK standards, the requirements of Sarbanes-Oxley were considered and adjustments made to comply with Sarbanes-Oxley as far as it applies
to BOC. The board continues to monitor the implementation of the rules to ensure continued compliance.
As
recommended by the US Securities and Exchange Commission (SEC), BOC has established
a disclosure committee. The committee comprises the Group finance director, Group
legal director and representatives from the finance, company secretarial, treasury,
investor relations, risk management and human resources functions. The committee
meets regularly. It is responsible for overseeing and advising on
the disclosure process for the quarterly announcements and on the content and
form of the annual report and Form 20-F. To permit the signing of the certifications
required by Sarbanes-Oxley the committee makes recommendations to the executive
management board on the adequacy of Group disclosure controls and procedures.
New York Stock Exchange Corporate Governance Listing Standards
The New York Stock Exchange (NYSE) has in place listing standards related to the corporate governance practices of listed companies. BOC, as a foreign private issuer with American
Depositary Shares listed on the NYSE, is required to comply with certain of these rules, in particular as they relate to audit committees, and must disclose any significant ways in which its corporate governance practices differ from those followed
by US domestic companies under the NYSE listing standards. At this time BOC does not believe that there are any significant differences in the corporate governance practices followed by the company as compared to those followed by US domestic
companies, except that the membership of the nomination committee is not composed entirely of independent non-executive directors. The membership of the nomination committee is however in line with the Combined Code on Corporate Governance, which
permits membership of this committee to be composed of a majority of independent non-executive directors.
The board
There are 12 members
of the board namely the chairman, five executive directors and six non-executive
directors who collectively have responsibility for leadership of the company. This
is considered to be the optimum size for the board, providing a balance between
executive management and non-executives and bringing a good mix of skills and
experience. As has been demonstrated during 2005 changes to the boards composition can be
managed without undue disruption. The directors holding office at the date of this report and their biographical details are given on pages 8 and 9. The executive directors are the chief executive, Group finance director and the three chief executives
of the lines of business. Kent Masters was appointed chief executive, Industrial and Special Products and a member of the board on 1 March 2005 in place of John Walsh who resigned from the board on 1 March 2005. Alan Ferguson joined the company as
Group finance director on 15 September 2005 and was appointed to the board on 30 September 2005 in place of René Médori
who resigned on 31 May 2005.
The board believes that executive directors and members of the executive management board can gain valuable experience and knowledge by taking on
non-executive directorships of other listed companies. Such appointments are subject to review by the nomination committee and approval of the board and, unless otherwise agreed, only one non-executive directorship may be held in a FTSE100 company.
Executives are permitted to retain any fees in respect of such external appointments, details of which are set out in the report on remuneration on page 76.
The
roles of chairman and chief executive have been separate since 1994. Rob Margetts
as chairman leads the board, ensuring that each director, particularly the non-executive
directors, is able to make an effective contribution. He monitors, with assistance
from the company secretary, the information distributed to the board to ensure
that it is sufficient, accurate, timely and clear. He meets twice a
year with the non-executive directors without the executive management present.
Between meetings, the chairman has responsibility for maintaining the integrity
and effectiveness of the board. This requires his interaction with the chief executive
between board meetings, as well as his contact with other board members and shareholders. Tony
Isaac as chief executive maintains day-to-day executive management responsibility
for the Groups operations, implementing Group strategies and
policies agreed by the board. The division of responsibilities between the chairman
and chief executive has been agreed by the board.
Corporate governance | 65 |
During the year Rob Margetts commitments have not changed. Details are set out in his biography on page 8. During 2005, as part of the board evaluation process, the non-executive
directors, led by Sir Christopher ODonnell as the senior independent director, reviewed the chairmans performance and considered this against the background of his other commitments. In their view the chairman has performed well against
all the measured criteria. He has consistently demonstrated full commitment to his responsibilities at BOC and he has always made himself available when circumstances have required additional time commitment. Rob Margetts appointment as
chairman assumes he will spend approximately one and a half days a week on activities at BOC. The board is satisfied that he has the personal commitment, the available time, including additional time should circumstances demand it, to fulfil his
responsibilities as chairman. Furthermore, the board is of the view that Rob Margetts expertise and the continuity that he brings to the post of chairman, is of great benefit to BOC.
The
senior independent director is Sir Christopher ODonnell. He has responsibility for chairing meetings of the non-executive directors at which the
chairmans performance is appraised. He is also available to shareholders
should they have any concerns which contact through other channels has failed
to resolve or for which such contact may be inappropriate.
During the year Iain Napier and Julie Baddeley resigned as independent non-executive directors on 22 December 2004 and 28 February 2005 respectively. Rebecca
McDonald was appointed as a non-executive director on 1 July 2005. Non-executive directors are initially appointed for a three year term after which, whilst not automatic, their appointment may be extended for a second term subject to mutual
agreement and shareholder approval.
The Group has long recognised the vital role that non-executive directors play in ensuring high governance standards. BOC has for many years had high calibre
non-executive directors who bring a wide range of experience and expertise to the BOC board. The board has determined that all the non-executive directors are independent in accordance with the definition of that term in the Combined Code on
Corporate Governance and the New York Stock Exchange listing standards and that they have no relationships which could materially interfere with the exercise of their independent judgement.
The
board has considered the position of Matthew Miau and determined that he is independent,
notwithstanding that he is also a non-executive director of BOC Lienhwa Industrial
Gases Company Limited, a 50:50 joint venture in Taiwan between BOC and Lien Hwa
Industrial Corporation. He is a representative of Lien Hwa Industrial Corporation,
a Taiwanese company. He does not have any executive
responsibilities with either company. Matthew Miau is the chairman of MiTAC-Synnex
Group, a major electronics organisation with a turnover greater than that of
BOC, and he brings considerable expertise in the electronics and semiconductor
markets and an Asian business perspective to the board of BOC. The turnover of
the joint venture attributable to BOC represents approximately one per cent of
the Groups total turnover. The board has satisfied itself that neither this
association nor the time period with which he has been connected with the company
are of sufficient significance to either BOC or Matthew Miau to compromise his
independence.
The
board has a formal schedule of matters reserved to it. In particular the boards main focus is on strategic and policy issues, reviewing objectives
and performance and the overall management of the Group. The board also has responsibility for the review and monitoring of key company policies in such areas as risk management, corporate governance, treasury matters and corporate social
responsibility including safety, environment and the Code of Conduct as well as all matters relating to the companys listings on the London and New York Stock Exchanges. On an annual basis the board reviews the senior managers and their
succession and development plans. The board has to approve all Group commitments in excess of £25
million. Presentations are made to the board on major projects and periodic reviews
are given by management from each of the lines of business and Gist. The board
delegates certain functions to committees. There are six board committees, details
of which are given below.
The
board meets six times a year, with two meetings held at major operating subsidiaries.
One of the board meetings is combined with a strategy meeting lasting over a
two day period. The meetings held at operating sites provide the opportunity for
the board to meet with the local management teams and receive presentations about
the local business operations. During 2005 the board visited the
Groups operations in South Africa and Poland.
66 | The BOC Group plc Annual report and accounts 2005 | Corporate governance |
The attendance of directors at board and principal board committee meetings during the year are detailed in the chart below:
Audit | Nomination | Remuneration | |||||||
Board | committee | committee | committee | ||||||
(six meetings) | (four meetings) | (six meetings) | (six meetings) | ||||||
Rob Margetts | 6 | n/a | 6 | n/a | |||||
Tony Isaac | 6 | n/a | 6 | n/a | |||||
Julie Baddeley1 | 3 | 2 | 3 | 3 | |||||
John Bevan | 6 | n/a | n/a | n/a | |||||
Andrew Bonfield | 6 | 4 | 6 | 6 | |||||
Guy Dawson | 6 | 4 | 6 | 6 | |||||
Alan Ferguson2 | n/a | n/a | n/a | n/a | |||||
Kent Masters3 | 3 | n/a | n/a | n/a | |||||
Rebecca McDonald4 | 1 | 1 | 1 | 1 | |||||
René Médori5 | 5 | n/a | n/a | n/a | |||||
Matthew Miau6 | 6 | 2 | 6 | 5 | |||||
Iain Napier7 | 1 | 1 | 2 | 2 | |||||
Sir Christopher ODonnell | 6 | 4 | 6 | 6 | |||||
Anne Quinn | 6 | 4 | 6 | 6 | |||||
Raj Rajagopal | 6 | n/a | n/a | n/a | |||||
John Walsh8 | 3 | n/a | n/a | n/a | |||||
1. | Julie Baddeley resigned on 28 February 2005 and she attended all board and committee meetings up to her resignation. |
2. | Alan Ferguson was appointed on 30 September 2005. This being the last day of the financial year he did not attend any board meetings. |
3. | Kent Masters was appointed on 1 March 2005 and he has attended all board meetings since his appointment. |
4. | Rebecca McDonald was appointed on 1 July 2005 and she has attended all board and committee meetings since her appointment. |
5. | René Médori resigned on 31 May 2005 and he attended all board meetings up to his resignation. |
6. | Matthew Miau missed three committee meetings due to conflicts in his schedule. |
7. | Iain Napier resigned on 22 December 2004. He attended all committee meetings up to his resignation but missed one board meeting due to a conflict in his schedule. |
8. | John Walsh resigned on 1 March 2005 and he attended all board meetings up to his resignation. |
Throughout 2005 the company continued to maintain directors and officers insurance.
There
is a well established procedure enabling any director, in the furtherance of
his or her duties as a BOC director, to seek independent professional advice
at the companys expense.
All directors have access to the advice and services of the company secretary. The company secretary is responsible for ensuring that the correct board
procedures are followed and advises the board on all corporate governance matters. In addition the company secretary manages the provision of information and documentation, notably meeting papers, to the board promptly with enough time to enable
them to prepare fully for any meeting. Both the appointment and the removal of the company secretary are matters for the whole board.
Induction and professional development
Upon
joining the board, new directors are required to undertake a full induction comprising,
as appropriate to the individual, site visits, meetings with the line of business
chief executives, each member of the executive management board and also key
advisers. New directors are also advised of their legal and other duties and
obligations as a director of a listed company. This is supplemented by a reference
binder, which is
regularly updated, including information about the board, the committees, directors duties, procedures for dealing in the companys
shares and other regulatory and governance matters.
Appropriate training and briefings are available to all directors on appointment and subsequently, as necessary, taking into account their individual
qualifications and experience and any training requirements identified during the annual performance review process. The company secretary monitors the availability and suitability of external courses, details of which are circulated to the board.
During the year certain directors attended external seminars relating to specific areas of their responsibility. The board receives regular briefings on governance and regulatory matters affecting the Group and its market sector activity and also on
litigation relating to the Group.
The
non-executive directors have full access to management and both internal and
external auditors, and are encouraged to stay fully abreast of the
Groups business, aided by site visits and meetings with senior management.
Corporate governance | 67 |
Performance
evaluation
In
line with the boards decision to alternate each year between an internally
and an externally facilitated review process, during 2005 an externally facilitated
review was undertaken with the emphasis on continuous improvement and effectiveness
of the board, its committees and the individual directors. The review focused
on matters such as the role and organisation of the board, the monitoring
of Group performance, board leadership and culture and board priority tasks
including strategy and safety. The effectiveness of each of the principal
committees was evaluated as was the performance of each director. The chairman
met with each director to give feedback on his or her individual performance.
The results of the review were
presented to the board. The chairmen of each of the audit, nomination and
remuneration committees reviewed the results of the evaluation of each committee
at meetings of their respective committees. The results were very positive,
showing an improvement in performance overall since the previous review. Where
areas for improvement have been identified, actions are being agreed. From
the results of the 2005 review the board and principal committees are comfortable
that they are operating effectively and that all directors continue to contribute
effectively and are committed to their respective roles at BOC.
Sir Christopher ODonnell,
as senior independent director, led a meeting of the non-executive directors
to review the performance of the chairman. Comments on the chairmans
performance are
given on page 65.
Board committees
There
are six board committees to which the board delegates specific areas of responsibility
as described below. The terms of reference of the audit, nomination and remuneration
committees are available on the companys website (www.boc.com) or upon
request to the company
secretary.
Whilst
only the members of each committee are entitled to attend the respective committee
meetings, the chairmen of each committee invite, as they consider appropriate,
management and advisers to certain meetings to assist the committees in carrying
out their duties.
Audit committee
Members:Andrew
Bonfield, Guy Dawson, Rebecca McDonald, Matthew
Miau, Sir Christopher ODonnell (chairman) and Anne Quinn. All members are
independent non-executive directors. Secretary: Nick Deeming.
The primary objective of the audit committee is to assist the board of directors in fulfilling its responsibilities related to: | |
| financial reporting and quarterly results announcements; |
| ensuring the independence and objectivity of the Groups external auditors; |
| determining the adequacy and effectiveness of the internal control environment. |
The audit committee
reviews its terms of reference on an annual basis.
The audit committee meets four
times a year, the agendas being organised around the companys financial
reporting cycle. Members attendance at meetings is detailed on page
66 and their qualifications are on pages 8 and 9. Time is set aside at one
of these meetings for the committee to meet with the internal and the external
auditors separately without the executive management present. The committee
reviews the effectiveness of internal controls, matters raised by the internal
and external auditors in their regular reports to the committee and the quarterly
financial statements prior to their release, as well as the arrangements
by which staff of the Group may, in confidence, raise concerns. The committee
also monitors that an appropriate relationship between BOC and the external
auditors is maintained and reviews the policies and procedures in place to
ensure the independence and objectivity of the audit. The work undertaken
by the committee during 2005 is described in more detail in its report below.
Andrew
Bonfield is considered by the board to be the audit committee financial expert.
He is considered to be independent in accordance with the definition of that
term in the Combined Code on Corporate Governance and the NewYork Stock Exchange
listing standards. All other members of the committee are
financially literate.
68 | The BOC Group plc Annual report and accounts 2005 | Corporate governance |
Audit committee report | |
In 2005 the audit committee discharged its responsibilities as set out in the terms of reference and the specific matters reviewed by the committee included: | |
i) | interim and full year financial results and announcement statements; |
ii) | interim and full year report from the internal audit function of progress against the 2005 audit plan and effectiveness of internal controls; |
iii) | the Groups project to comply with the requirements of Section 404 of the US Sarbanes-Oxley Act. |
This review included the project plan, progress against the plan and matters arising in the implementation of the plan; | |
iv) | details of the Groups project to transition to International Financial Reporting Standards from 2006; |
v) | the external audit plan for 2005 presented by the Groups auditors, PricewaterhouseCoopers LLP (PwC). |
This review included the audit objectives, auditor independence and objectivity policies managed by PwC, partner rotation, audit scope, team, timetable deliverables and fee proposal; | |
vi) | the annual report disclosure items relevant to the audit committee. Included in this review were the Groups critical accounting policies, the going concern statement, the report on risk and internal controls and the risk factors statement. The audit committee also reviewed the disclosure control review procedures employed by the Group which enabled the chief executive and Group finance director to sign the Section 302 and 906 certificates pursuant to the US Sarbanes-Oxley Act; |
vii) | the external auditors report to the committee for 2005; |
viii) | the independence and objectivity of the external auditors, including a review of non-audit fees. The audit committee has reviewed and approved a policy for the provision of non-audit services by the external auditors. This policy has been in place since 2002 and defines services which can be provided by the auditors. The policy also specifies which services cannot be provided. The policy requires all non-audit services to be approved in advance by the audit committee, which has delegated this task to the chairman of the audit committee. The approval process requires full disclosure of the objectives and scope of the services to be performed and fee structure. The audit committee reviews all approved services at subsequent meetings. The auditors are permitted to perform non-audit services only if the scope of work is within the terms of the policy and there is a business benefit to the Group in these services being performed by the external auditors rather than an alternative supplier. The level of the fee spend is closely monitored to ensure independence and objectivity of the audit is maintained. Further details of actual fees paid to external auditors are given in note 2c) on page 97; |
ix) | the procedures by which staff can report, in confidence, any matters of a financial or non-financial nature alleging breaches of the Groups Code of Conduct. The audit committee also reviewed the procedures by which allegations are reported to senior management and the audit committee. |
During this period the audit committee met with the Groups external auditors without the presence of management. The audit committee also met with the Groups head of internal
audit without the presence of management. The head of internal audit has access to the chairman of the audit committee, if necessary, outside of meetings.
Regular
attendees to audit committee meetings, at the invitation of the chairman of the
committee, include: the chairman, chief executive, Group finance director, director
of risk management, head of business assurance audit, director financial planning
and control, and the external auditors. Other senior managers are invited to
attend as required to participate in presentations or discussions to
enable the committee to discharge its duties.
The audit committee concludes that, based on the foregoing, it has discharged its responsibilities as set out in the terms of reference and is satisfied that
auditor independence and objectivity have been maintained.
Nomination committee
Members:Andrew
Bonfield, Guy Dawson,Tony Isaac, Rob Margetts (chairman), Rebecca McDonald,
Matthew Miau, Sir Christopher ODonnell and Anne Quinn. The majority of members
are independent non-executive directors. Secretary: Nick Deeming.
The nomination committee reviews its terms of reference on an annual basis.
The
nomination committee meets periodically as required but at least annually. During
2005 the committee met six times. Members attendance at meetings
is detailed on page 66. The committee primarily monitors the composition and balance
of the board and its committees, and identifies and recommends to the board the
appointment of new directors. The committee also keeps under review the board
committee structure and the composition of each committee and makes recommendations
to the board of any changes considered necessary. Whilst the chairman of the
board chairs this committee he is not permitted to chair meetings when the appointment
of his successor is being considered or during discussions regarding his performance.
The
committee reviews annually the succession plans for the executive directors and
the executive management board. During 2005 the vacant roles of chief executive,
Industrial and Special Products and Group human resources director were both
filled by internal candidates. The committee also considers the reappointment
of non-executive directors upon expiry of their term of office and the proposals
for
re-election of directors retiring by rotation at the Annual General Meeting.
Directors submit themselves for re-election at regular intervals and at least
every three years in accordance with the companys Articles of Association
and the Combined Code on Corporate Governance. During these deliberations consideration
is given to the results of the annual board evaluation. The evaluation process
is explained in more detail above. The Notice of Annual General Meeting is contained
in a
separate circular and details the directors who will be standing for election
and re-election at the meeting.
Corporate governance | 69 |
During the year one new non-executive director and two executive directors were appointed to the board. When considering the appointment of new directors the committee reviews the current balance of skills and experience on the board. A detailed specification is drawn up to include any specific knowledge or expertise that is considered of future benefit to the board and having regard to the business throughout the Group and the overall business strategy. For executive vacancies internal candidates identified through the succession planning process are always considered in the first instance. External search consultants are used to identify suitable candidates for non-executive positions or where alternative candidates are required for executive vacancies. The consultant draws up a short list of candidates for consideration. The committee then reviews and evaluates the short listed candidates before submitting its recommendation to the board as a whole.
Remuneration committee
Members:Andrew
Bonfield, Guy Dawson (chairman), Rebecca McDonald, Matthew Miau, Sir Christopher
ODonnell and Anne Quinn. All members are independent non-executive directors.
Secretary: James Cullens.
The remuneration committee reviews its terms of reference on an annual basis.
The
remuneration committee meets six times a year. Members attendance at meetings is detailed on page 66. The committee recommends to the board the
policy on executive directors remuneration and the specific remuneration, benefits and terms of employment of each executive director. The committees full report on directors remuneration
is set out on pages 72 to 83.
Pensions committee
Members: Guy Dawson (chairman),Alan Ferguson,Tony Isaac, Rob Margetts. Secretary: Stephen Pegg, Corporate pensions director.
The
pensions committee meets twice a year and oversees the review of governance and
control procedures applying to all employee retirement benefit plans, and reviews
and makes recommendations on the investment policies and strategies applied to
the Groups retirement benefit plans.
Executive management board
The members of
the executive management board are detailed on pages 10 and 11 and are considered
as the officers of the company. The executive management board is chaired by Tony
Isaac. All members held office throughout the year ended 30 September 2005 except
that John Walsh resigned on 31 March 2005, Rob Lourey resigned on 30 April 2005
and René Médori resigned on 31 May 2005. James Cullens, Group human
resources director, became a member of the executive management board on 30 April
2005 and Alan Ferguson, Group finance director, did so on 15 September 2005. There
have been no further changes up to the date of this report.
The
executive management board meets regularly having primary authority for the day-to-day
management of the Groups operations and policy
implementation in line with the Groups strategy agreed by the board.
Investment committee
Members:
John Bevan, Alan
Ferguson,Tony Isaac (chairman), Kent Masters, Mark Nichols, Raj Rajagopal,
and representatives from the finance function.
The
investment committee meets regularly and reviews and approves Group commitments
up to £25 million as delegated by the board. Group commitments over
£25 million are presented to the board for approval on recommendation from
the committee.
Accountability and audit
Statements of the respective responsibilities of the directors and auditors for these accounts are set out on pages 84 and 85.
Risk management and internal controls
This statement of compliance with the Combined Code on Corporate Governance in respect of risk management and internal controls is in line with the arrangements set out by the Financial
Reporting Council.
The board has overall
responsibility for the Groups system of risk management and internal controls. The schedule of matters reserved to the board ensures that the directors maintain full and effective control over all significant strategic, financial, organisational and compliance
issues.
Risk management in BOC The BOC risk management programme assists management throughout the Group to identify, assess and
mitigate business risk on a continuous basis.
The objective of risk management within BOC is to improve performance and decision making through identification, assessment and mitigation of key
risks.
A dedicated central
team of risk management specialists is responsible for delivering the risk management
programme. During 2005 approximately 86 risk workshops or reviews have been
conducted covering a broad range of matters. These include risks in strategy,
risks in meeting business unit targets, risks in acquisitions or ventures and
risks in major projects.
The
risk management process operates on a global basis and covers the Groups
key risks, lines of business, business units and corporate
functions.
The output from
each risk assessment is a set of prioritised risks with associated action plans. Line
management retains responsibility for completion of action plans. Progress of
action plans is monitored and reported.
A
report on the risk management process is provided to the board twice a year.
These reports include reviews of key strategic risks to the Group as well as
the individual lines of business and identifies the status of action plans against
key risks.
70 | The BOC Group plc Annual report and accounts 2005 | Corporate governance |
Internal controls in BOC The directors have delegated to executive management the establishment and implementation of a system of internal controls appropriate to the various business environments in which it operates. The Group operates under a system of controls that has been developed and refined over time to meet its current and future needs and the risks and opportunities to which it is exposed. These controls, which are communicated through various operating and procedural manuals and processes, include but are not limited to: | |
| The definition of the organisational structure and the appropriate delegation of authorities to operational management; |
| Procedures for the review and authorisation of capital investments through the investment committee including post-acquisition reviews and appraisals; |
| Strategic planning and the related annual planning process including the ongoing review by the board of the Groups strategies; |
| The establishment of individual business unit annual performance targets and the quarterly business review of actual performance; |
| The monthly financial reporting and review of financial results and other operating statistics such as the health and safety reports as well as the Groups published quarterly financial statements, which are based on a standardised reporting process; |
| Accounting and financial reporting policies to ensure the consistency, integrity and accuracy of the Groups accounting records; |
| Specific treasury policies and objectives and the ongoing reporting and review of all significant transactions and financing operations. |
The internal control system is monitored and supported by an internal audit function that operates on a global basis and reports its results on the Groups operations to management
and the audit committee. The work of the internal auditors is focused on the areas of greatest risk to the Group determined on the basis of a risk management approach to audit.
There
have been regular reviews by the audit committee of the board of the effectiveness
of the Groups overall internal control processes throughout
the year.
During
2005 the Group has developed and progressed its plan to meet the requirements
of Section 404 of the US Sarbanes-Oxley Act 2002 which is a requirement for BOC
with effect from 2006. The internal audit function has played an important role
in developing and implementing the plan to identify, document and test key controls
over financial reporting as required by Section 404 and will have a
significant role in supporting managements evaluation of design effectiveness
and operational effectiveness of these controls.
The
directors therefore believe that the Groups system of risk management and
internal controls provides reasonable but not absolute assurance that assets
are safeguarded, transactions are authorised and recorded properly and that material
errors and irregularities are either prevented or would be detected within a
timely period.
Having
reviewed its effectiveness, the directors are not aware of anything in the Groups
system of internal controls during the period covered by this report and accounts
which would render them ineffective.
There
were no changes in the Groups internal controls over financial reporting that occurred in the year ended 30 September 2005 that have materially
affected, or are reasonably likely to affect, the Groups internal control
over financial reporting.
Disclosure controls and procedures
The
chief executive and Group finance director, based on the evaluation of the effectiveness
of the Groups disclosure controls and procedures as of the end of the period covered by
this annual report and accounts, have concluded that, as of such date, the Groups
disclosure controls and procedures were effective.
Going concern
The
directors report on going concern is included in the financial review on
page 63.
Communication with shareholders
The
board considers communication with shareholders, whether institutional, private
or employee shareholders, to be extremely important. A variety of communication
mechanisms are used by the company. Financial results are published quarterly,
and half year and annual reviews are sent to all shareholders. Copies of the
full annual report are available by election or on request. The companys
website (www.boc.com) provides financial and other business information about
The BOC Group. It contains an archive of past announcements and annual reports,
share price information and a calendar of events as well as BOCs social
responsibility policies, including the
companys Code of Conduct. There are also facilities in place to enable
shareholders to receive communications from the company in electronic form rather
than by
mail and for shareholders to provide their proxy votes for the Annual General
Meeting by electronic means.
The
Annual General Meeting provides an opportunity for shareholders to question directors
about the companys activities and prospects. The chairmen of
each of the principal board committees are normally present. Members of the board
meet informally with shareholders after the meeting. During the year responses
are given to letters received from shareholders on a variety of subjects.
Separate
resolutions are proposed for each substantially separate item of business proposed
at the Annual General Meeting. All resolutions will be voted on by taking a poll,
with an indicative result advised to the meeting and the verified result announced
as soon as practicable after the meeting. The proxy voting result will also be
available on the companys website (www.boc.com).
Corporate governance | 71 | ||||
There
is a programme of regular dialogue with major institutional shareholders
and fund managers which is led by the chief executive and Group finance director
although the chairman, senior independent director and other board members
are offered the opportunity to attend meetings with major shareholders and
are expected to do so if shareholders request. The company also maintains
contact, when appropriate, through the chairman
of the remuneration committee and other executive management to discuss overall
remuneration policies and plans. Summaries of these discussions and meetings
are provided to the board. In addition the board receives copies of most
analysts and
brokers reports issued on the company. Periodically the board receives
presentations from external advisers on investor perceptions. These summaries,
reports and presentations enable the directors to gain an understanding of the
views and
opinions of those with an interest in the company.
The directors are supported by the companys investor relations department, which is in regular contact with institutional shareholders, analysts and
brokers. All contact with major shareholders, analysts, brokers and the media is controlled by strict company guidelines to ensure that any price sensitive information that has not been made generally available to all shareholders and potential
investors is protected.
Annual General Meeting
The Annual General Meeting will be held at the Institution of Electrical Engineers (Lecture Theatre), Savoy Place, London WC2R 0BL on Friday 27 January 2006 commencing at 11.00 am. The
Notice of Annual General Meeting, which includes explanations of all resolutions, is contained in a separate circular which is being sent to all shareholders more than 20 working days before the meeting.
Resolutions will seek approval to the following: | |
a) | receipt of the report and accounts; |
b) | the dividend policy; |
c) | reappointment of Kent Masters, Rebecca McDonald, Alan Ferguson, John Bevan, Matthew Miau and Sir Christopher ODonnell as directors; |
d) | reappointment of PricewaterhouseCoopers LLP as auditors and granting authority to the directors to fix their remuneration; |
e) | approval of the directors remuneration report; |
f) | renewal of the authority for the directors to allot shares; |
g) | renewal of the authority for the directors to allot shares for cash other than to existing shareholders in proportion to their holdings; |
h) | granting of general authority for the company to purchase its own shares up to a maximum of ten per cent of issued share capital. No purchases were made following last years authority; and |
i) | amendments to the Articles of Association. |
The report of the directors has been approved by the board and signed on its behalf by:
Nick Deeming Company Secretary
28 November 2005
72 | The BOC Group plc Annual report and accounts 2005 | ||
Report on remuneration | |||
The remuneration committee | ||
The remuneration committee comprises all the independent non-executive directors, namely Guy Dawson (chairman),Andrew Bonfield, Matthew Miau, Sir Christopher ODonnell,Anne Quinn and Rebecca McDonald (appointed 1 July 2005). Whilst neither the Group chairman nor the chief executive are members of the remuneration committee they both attend the meetings by invitation but are not present when their personal remuneration is discussed and reviewed. The Group human resources director acts as secretary to the committee and provides it with information and data from national and international surveys. He is assisted by the Group compensation and benefits director. In addition the remuneration committee has appointed Towers Perrin to advise on the remuneration arrangements for senior executives. | ||
The remuneration committee sets the overall remuneration policy of the Group and makes recommendations to the board on the framework of executive remuneration. It meets six times a year. Individual member attendance at the meetings is shown on page 66. The terms of reference are reviewed annually to ensure that they conform with best practice. Specifically, the remuneration committee determines, on behalf of the board, the detailed terms of service of the executive directors and other members of the executive management team including basic salary, performance-related bonus arrangements, benefits in kind, long-term incentives and pension benefits. The remuneration committee also reviews the remuneration of the chairman, following a recommendation from the chief executive and the senior independent director. The board as a whole determines the non-executive directors fees. | ||
Remuneration policy | ||
BOCs remuneration policy for executive directors and other executive management is designed to attract and retain executives of the highest calibre so that the Group is managed successfully to the benefit of its stakeholders. In setting remuneration levels the remuneration committee takes into account the remuneration practices found in other UK listed companies of similar size, internationality and complexity. The policy is to pay salaries and total remuneration around mid-market levels for on target performance and to provide the opportunity, via annual and long-term incentives, for executives to be rewarded at the 75th percentile if this is justified by the achievement of top of the range performance goals. It is the view of the remuneration committee that performance-related remuneration should form a substantial element of total remuneration. Based on assumptions about expected values for awards from the Long-Term Incentive Plan (LTIP) and the Share Matching Plan (SMP), the proportion of performance-related remuneration to fixed remuneration (excluding pensions and benefits in kind) for current arrangements is approximately 67 per cent to 33 per cent (see chart 1). | ||
Last year, the remuneration committee made a number of changes to the performance-related elements of the executive remuneration package. These changes were approved by shareholders at the Annual General Meeting in January 2005. The changes included the ceasing of option awards under the Executive Share Option Scheme, an increase in target and maximum value of the Variable Compensation Plan (VCP) with one third of the bonus being compulsorily transferred into a new SMP, and an increase in the maximum award level for the LTIP. The increase in the maximum LTIP award level was to ensure that the remuneration committee has the flexibility to remain fully competitive in the event that a higher level of award was required for an appointment to an executive role. The remuneration committee does not propose to make any significant changes to the executive remuneration package this year. | ||
Remuneration components | ||
Basic salary Salaries for executive directors and executive management board members are based on median market rates drawn from market data provided by remuneration consultants,Towers Perrin, and take account of an executives experience, responsibilities and performance. Performance is assessed both from an individual and business perspective. Remuneration for those executives of businesses outside the UK is denominated in the local currency. | ||
Benefits in kind Benefits in kind comprise company car benefits and membership of BOCs healthcare insurance scheme. Where appropriate, directors on international assignment receive overseas allowances such as housing and childrens education fees. These allowances are on similar terms to those applying to other employees on the international programme. Such benefits are in line with those offered by peer group companies. Benefits in kind do not form part of pensionable earnings. |
Report on remuneration | 73 | ||||
Variable Compensation
Plan (VCP) The
executive directors and senior management participate in the variable compensation
bonus plan. The plan focuses on annual objectives and links individual performance
with business plans. Last year, as part of the review of performance-related
elements of the executive remuneration package, the remuneration committee agreed
that the
target and maximum value of the VCP be increased to 110 per cent and 160 per
cent of salary respectively and that one third of the VCP bonus be compulsorily
deferred into the Share Matching Plan. Details of the plan are shown on page
74. The financial targets for the executive directors and other executive management
board members are set on an annual basis by the remuneration committee and performance
against these targets is reviewed by the remuneration committee on a six monthly
basis. The remuneration committee considers that a six monthly review acts as
a significant incentive and is conducive to sustaining performance throughout
the year. The financial targets are based equally on adjusted earnings per share
(EPS) and adjusted return on capital employed (ROCE) at Group level. Adjusted
means excluding exceptional items. Bonuses are assessed two thirds on these financial
targets with the remaining third based on personal objectives. These are based
on BOCs
strategic priorities and include safety, growth, people and change management
and productivity. Performance is measured against key performance indicators
determined during formal appraisals. There is a threshold performance level below
which no bonus is paid. For the financial year 2005 the financial targets set
by the remuneration committee were EPS 66p and ROCE 15.3 per cent and the achievement
against these targets was EPS 64.3p and ROCE 15.3 per cent. The bonus payable
in respect of the
financial targets amounts to 58.6 per cent of salary. In addition, an amount
equal to 29.3 per cent of salary has been deferred into the Share Matching Plan.
The
bonuses for the executive directors and other members of the executive management
board are paid half yearly following the remuneration committee review. Details
of the payments to directors are included in the directors remuneration
for the year on page 78.
Current long-term incentive arrangements
Long-Term Incentive
Plan (LTIP) Executive
directors, members of the executive management board and a number of other key
executives selected from the companys global operations participate in
the LTIP. The remuneration committee has the discretion to grant awards up to
a maximum of 2.5 times salary. The award made in November 2004 to the chief executive
was based on 2 times salary and for other board directors 1.5 times salary.
There are three performance conditions: total shareholder return (TSR), adjusted
earnings per share (EPS) and adjusted return on capital employed (ROCE). Up to
one third of the award
could vest in respect of each performance condition.
The
TSR performance condition compares BOCs TSR performance with two separate
comparator groups, a UK comparator group comprising 31 industrial and manufacturing
companies and a global industrial gases group of six leading companies as follows:
UK group | ||||||
Aggregate Industries | BPB | Invensys | Scottish & Southern Energy | |||
AMEC | Centrica | Johnson Matthey | Scottish Power | |||
Anglo American | Corus Group | Kelda Group | Severn Trent | |||
AWG | FKI | National Grid Transco | Shell Transport &Trading | |||
BAE Systems | Hanson | Pilkington | Smiths Group | |||
BG Group | IMI | Rio Tinto | Tomkins | |||
BHP Billiton | ICI | RMC Group | United Utilities | |||
BP | International Power | Rolls-Royce | ||||
Aggregate Industries and RMC Group were taken over in 2005. Their TSR performance to the point at which they were taken over has been included in the performance measurement.
Global gases group | ||
Airgas | (US S&P 500 Index) | |
Air Liquide | (France CAC 40 Index) | |
Air Products & Chemicals | (US S&P 500 Index) | |
Linde | (Germany DAX 30 Index) | |
Taiyo Nippon Sanso | (Japan NIKKEI 225 Index) | |
Praxair | (US S&P 500 Index) | |
The BOC Group | (UK FTSE100 Index) | |
When determining BOCs performance relative to the global gases group, the TSR for BOC and the comparator companies is adjusted (adjusted TSR) so that it reflects the excess (or shortfall) in returns relative to the local stockmarket index where each company has its primary listing. The nationality and the local stockmarket index that is used to calculate the adjusted TSR for each company is shown in the parentheses.
74 | The BOC Group plc Annual report and accounts 2005 | Report on remuneration |
For the awards
made in November 2004 which will vest in November 2007, the target set by the
remuneration committee is such that if the companys TSR position measured
over a three year period is median in respect of both comparator groups, then
40 per cent of the shares in respect of the TSR part of the award will vest.
If the companys TSR position is upper quartile, all of the shares in respect
of the TSR part of the award will vest. If the TSR performance is between the
median and upper quartile, a proportion of between 40 per cent and all of the
shares in respect of the TSR part of the award will vest. If the companys
TSR position is below the median for both comparator groups, the TSR part of
the award will lapse. The same TSR performance criteria were used for the awards
made in the financial year 2004. The remuneration committee has decided that
for
any awards made in the financial year 2006
onwards, 25 per cent rather than 40 per cent of the shares for the TSR part of
the award will vest at median.
The
adjusted EPS performance condition is based on the companys EPS relative
to three year targets on a sliding performance scale. For the awards made in
November 2004 which will vest in November 2007, the target set by the remuneration
committee is 70.3p at the end of the three year performance period for minimum
vesting. If this is achieved, 40 per cent of the shares in respect of the EPS
part
of the award will vest. All of the shares in respect of the EPS part of the award
will vest if the company achieves 80.8p at the end of the three year performance
period. If the EPS performance is between 70.3p and 80.8p, a proportion of between
40 per cent and all of the shares in respect of the EPS part of the award will
vest. If EPS is less than 70.3p at the end of the three year period, the EPS
part of the award will lapse. The EPS targets for the financial year 2004 awards
were 60.3p for
threshold vesting and 69.3p for full vesting.
The
adjusted ROCE performance condition is based on the companys ROCE relative
to three year targets on a sliding performance scale. For the awards made in
November 2004, and for further awards, the remuneration committee decided that
it would be appropriate to widen the ROCE band. The threshold target set by the
remuneration committee for the November 2004 awards, which will vest in November
2007, is 13.5 per cent at the end of the three year performance period. If this
is achieved, 40 per cent of the shares in respect of the ROCE part of the award
will vest. All of the shares in respect of the ROCE part of the award will vest
if the
company achieves a ROCE of 16 per cent. If the ROCE performance is between 13.5
per cent and 16 per cent a proportion of between 40 per cent and all of the shares
in respect of the ROCE part of the award will vest. If the ROCE is less than
13.5 per cent the ROCE part of the award will lapse. The ROCE targets for the
financial year 2004 awards were 13.5 per cent for threshold vesting and 15 per
cent for full vesting.
In
setting three performance conditions for the LTIP awards, the remuneration committee
took the view that these were the most important measures that drive or measure
sustainable improvements in shareholder value: the TSR performance condition
measures comparative performance while EPS and ROCE reflect a core part of the
companys business strategy, enabling high levels of both earnings growth
and capital efficiency. Details of the awards made to directors are shown on
page 82.
For the awards made for the financial year 2003, the performance conditions have been met to the extent that 52.6 per cent of the shares vest on the third
anniversary of the award date.
Share Matching Plan
(SMP) The
plan was adopted by shareholders at the 2005 Annual General Meeting. Executive
directors, members of the executive management board and other senior managers
who participate in the VCP are eligible to participate in the SMP. One-third
of any VCP award is compulsorily applied to the acquisition of BOC shares. The
executives will become
entitled to these shares only if they are still in service with BOC three years
after the award is made or are considered to be good leavers. The
executives will receive an additional number of shares equal to the value of
the dividends paid during the deferral period of the shares and they may also
receive a matching share award of up to 100 per cent of the number of shares
originally allotted. The percentage award will depend on the companys performance
over the deferral period. Adjusted EPS will account for 75 per cent of the performance
weighting, with TSR accounting for the remaining 25 per cent. The adjusted EPS
performance condition is based on the companys EPS relative to three year
targets. These targets will be on a sliding scale, where five per cent per annum
growth rate over three years is required for threshold vesting of 25 per cent
of that portion. Full vesting will be achieved if EPS growth is 12 per cent per
annum over the three year
period.
The
TSR performance condition compares BOCs TSR performance against the same
UK comparator group as used for the LTIP. Awards will vest for this portion
where BOCs TSR position is median, measured over three years. At this point
25 per cent of this portion of the award will vest. Full vesting occurs if the
company is ranked at or above the upper quartile. Details of the value of VCP
awards for directors that will be applied to the acquisition of BOC shares under
the SMP are shown on page 78.
Executive Share Option Scheme 2003 (ESOS 2003)The last grant under the ESOS 2003 to executive directors and employees who participate in the SMP took place in November 2003. The scheme was retained for selected middle management throughout the companys global operations. However, it is intended to develop an alternative scheme for this group in the financial year 2006. The performance condition set for the ESOS 2003 by the remuneration committee is that the growth in the adjusted EPS over a three year performance period must be equal to or greater than the growth in the UK retail prices index (RPI) plus three per cent per annum over the three year performance period. In line with current corporate governance best practice there is no rolling retesting of performance. In the event that the performance condition is not satisfied over the original three year period then the remuneration committee has the discretion to re-test performance after five years, but only where the remuneration committee believes the extension to be a fair and reasonable basis for assessing the sustained underlying performance of the company.
Report on remuneration | 75 | |
Awards under the LTIP, SMP and ESOS 2003 which vest may be satisfied in cash, for example, where it is necessary for legal or tax reasons. The amount to be paid will, in the case of share
options, be equal to the participants gain on the exercise of the share option. Also, the remuneration committee may decide, prior to grant, that an award shall be expressed to be a right to acquire a cash sum rather than shares.This type of
award, known as a phantom award, will normally only be granted to participants in jurisdictions where, because of local securities laws or exchange control provisions, it is difficult to issue or transfer shares to employees. The LTIP, SMP and ESOS
2003 awards may be satisfied by using existing shares purchased in the market through The BOC Group plc Employee Share Trust or by issuing new shares. In addition, the SMP awards may be satisfied by using shares held in treasury.
Awards under the LTIP, SMP and ESOS 2003 are not pensionable.
The current performance measures as a percentage of salary for on target performance are shown in chart 2.
Savings Related Share Option Schemes New schemes were adopted by shareholders at the 2005 Annual General Meeting . These are operated in the UK,Australia, New Zealand and Ireland and are open to all employees, including executive directors, with one years service or more. The UK scheme is approved by HM Revenue and Customs.
TSR performance
The graph to the
left has been included to meet the requirement set out in the Directors Remuneration
Report Regulations 2002. It shows BOCs TSR performance, assuming
dividends are reinvested, compared with all FTSE100 companies.This has been chosen
because it provides a basis for comparison against companies in a relevant, broad
based equity index of which BOC is a constituent member. The remuneration committee
decided that other comparator groups were more appropriate as performance measurement
for the LTIP. A graph showing BOCs TSR performance compared with the six
major gases companies relative to respective local indices, which is one of the
comparator groups chosen for the LTIP, is shown in the chairmans statement
on page 5.
Former long-term incentive arrangements
Executive Share Option Scheme 1995 The last grant of options to the executive directors and members of the executive management board took place in February 2002 and the last award to other Group employees took place in December 2002. No further awards will be made under this scheme. The options vest when the companys adjusted EPS growth is equal to, or exceeds, the growth in the retail prices index (RPI) by three per cent per annum over any three year performance period.
Details of directors individual remuneration, share options, LTIP awards, amounts deferred from VCP bonus to SMP and shareholdings are given on pages 78 to 82.
Retirement benefits
Pension arrangements for executive directors are in line with those of comparable executives in the countries in which the directors are located.
In
the UK, the BOC senior executive pension scheme is a funded, tax-approved, defined
benefit pension arrangement. Where necessary, the directors
pensionable pay is limited by the earnings cap provisions of the
Finance Act 1989. In such cases, the company pays the director a salary supplement
on earnings above the earnings cap to reflect the loss of pension coverage.This
supplement is recorded in the directors emoluments and is not taken into
account in calculating bonuses or any other form of remuneration.
BOC
closed its UK defined benefit pension arrangements to all new employees on 30
June 2003. Pension arrangements for new employees are provided under a defined
contribution Retirement Savings Plan. The company makes contributions to the
plan equal to two times the employees core contributions which can be three,
four or five per cent of salary.
From
6 April 2006, the new Life Time Allowance rules will apply to UK pension provision.
BOC will continue to provide benefits under its defined benefit and defined contribution
pension arrangements as set out above. As an alternative, it will allow employees
whose benefits will, or are likely to, exceed the Life Time Allowance to opt
out of some, or all, further tax-approved pension provision. In such
cases, the company will pay the individual a salary supplement on earnings which
no longer benefit from pension coverage. For members of the defined benefit
arrangements, the supplement will be at the same rate as now applies to earnings
above the earnings cap and for members of the defined contribution
pension arrangements, the supplement will be at the rate which would have been
paid into the Retirement Savings Plan. In both cases the supplement, when paid,
will be similarly
recorded in the directors emoluments.
In the US, the
Cash Balance Retirement Plan is a funded, tax-qualified, defined benefit arrangement.
In
the US, the BOC Senior Executive Retirement Plan is an un-funded, non-tax-qualified,
defined benefit arrangement which tops up the benefits provided under the Cash
Balance Retirement Plan.
In Australia, the BOC Gases Superannuation Fund is a funded, defined contribution arrangement underpinned by a defined benefit guarantee for long-serving
employees who were members under a prior benefit structure.
76 | The BOC Group plc Annual report and accounts 2005 | Report on remuneration |
Outside appointments
The remuneration
committees view is that non-executive directorships are a significant benefit in broadening executives experience. Any such appointments are subject to review
by the nominations committee and the approval of the board. The executive is permitted to retain any fees for the service.Tony Isaac received fees of £50,000 as a non-executive director of International Power plc and US$70,000 and an annual
award of 2,000 shares as a non-executive director of Schlumberger Ltd. Dr Raj Rajagopal received fees of US$15,000 and an option over 15,000 shares at an option price of $4.21 as a non-executive director of FSI International Inc. and £13,542
as a non-executive director of Foseco plc.
Non-executive directors
Non-executive directors
are initially appointed for a three year term after which, whilst not automatic,
their appointment may be extended for a second term subject to mutual agreement
and shareholder approval. The fees are set at a level which will attract individuals
with the necessary experience and ability to make a significant contribution
to The BOC Groups affairs and are benchmarked with those fees paid by other UK
listed companies. The basic fees for the non-executive directors are £40,000 per annum, £10,000 of which, less tax, is invested in BOC shares. In addition, the fees for chairing a committee are £10,000 per annum, £5,000 of
which, less tax, is invested in BOC shares. Following a review in November 2005 the board agreed that the basic fee should be increased by £5,000 per annum with effect from 1 January 2006.This increase, less tax, will be invested in BOC
shares. The fee for Rob Margetts, company chairman, is £260,000 per annum.
The
non-executive directors do not have service contracts. They do not participate
in the Groups variable compensation arrangements, its long-term
incentive arrangements or its pension arrangements. They do not receive any benefits
in kind.
Appointment of director
Alan Ferguson joined
the company on 15 September 2005 and was appointed a director on 30 September
2005. As permitted under 9.4.2R(2) of the Listing Rules, Mr Ferguson received
an award
of shares to the value of £550,000 on the day he joined the company.Two
thirds of this award will vest in March 2006. The remaining shares will vest in
March 2007. He also received an award of shares to the value of 200 per cent
of salary under the LTIP. Vesting will be in accordance with the performance
conditions and performance period set by the remuneration committee for the November
2004 LTIP award. In addition, the number of shares vesting will be pro-rated
to the number of months
worked during the performance period.This will amount to twenty four months at
the expected vesting date. These awards were used to facilitate the recruitment
of Mr Ferguson. He held a significant number of share options and restricted
shares under
his previous employers share plans. The value of the awards provided was
calculated on a straight swap basis and will be payable unless his employment
is terminated by reason of summary dismissal. The details of Mr Fergusons
contract are
included below.
Future arrangements for chief executive
Tony Isaac, the
chief executive is due to retire in 2007. The remuneration committee wish to ensure
that he continues to be rewarded appropriately. With this in mind the remuneration
committee has decided that he should continue to participate in the long-term
incentive arrangements during the financial year 2006. However for the financial
year 2007 the remuneration committee have agreed that he should not participate
in these
arrangements and propose to award delivery of his 2007 objectives solely in cash,
based on salary and cash bonus and linked to additional specific and rigorous
performance conditions.This approach will align Mr Isaacs pay with that
of the
other directors, although at a lower level of deferred pay.
Service contracts
The companys
policy is for all executive directors to have contracts of employment that terminate
on the attainment of retirement age. In order to mitigate its liability on early
termination, the companys policy is that it should be able to terminate
such contracts on no more than 12 months notice, and that payments on termination
are restricted to the value of salary, car benefit and bonus entitlement (calculated
on the basis of the average of actual payments over the preceding two years)
for the unexpired portion of the notice period. The company has revised this policy
further for all new appointments, so that in the event of early termination,
the company will pay either monthly compensation calculated as per the terms
set out above for the unexpired portion of the notice period, or else a lump
sum payment equal to the base salary pro-rated to the unexpired portion of the
notice period. In the event that monthly compensation is paid, should an individual
obtain alternative employment during the period of the monthly payments, the
companys
obligation is reduced by the amount of the monthly remuneration from the alternative
employment. The revised policy has applied to all new appointments during the
financial year and will apply to subsequent appointments. Pension provisions
on termination are detailed in the individual service contracts below.
Report on remuneration | 77 | |
Individual service contracts Mr
Bevan has a contract dated 5 December 2002 that can be terminated by the
company on 12
months notice. In the event of early termination, the contract provides
for the payment of compensation based on the value of salary, car benefit and
bonus entitlement (calculated on the basis of the average of actual payments
over the preceding two years) for the unexpired portion of the notice period.
Mr Bevan would also be entitled to his deferred pension, with the unexpired portion
of the notice period being added to his pensionable service in the calculation
of his pension
entitlement.
Mr
Isaac has a contract dated 19 November 2002, varied by letter dated 1 June 2004,
which expires upon the conclusion of the Annual General Meeting in 2007 subject
to possible extension by mutual agreement. The contract can be terminated by
the company on 12 months notice. In the event of early termination, the contract provides for the payment of compensation based on the value of salary, car
benefit and bonus entitlement (calculated on the basis of the average of actual payments over the preceding two years) for the unexpired portion of the notice period. Mr Isaac would also be entitled to a contribution to his funded unapproved
retirement benefit scheme amounting to the sum of 40 per cent of his pay above the pension cap imposed
by the Finance Act 1989 and 58.33 per cent of his pay up to the cap for the unexpired
portion of his notice period.
Dr
Rajagopal has a contract dated 1 May 1999, amended 22 November 2002, that can
be terminated by the company on 12 months notice. In the event of
early termination, the contract provides for the payment of compensation based
on the value of salary, car benefit and bonus entitlement (calculated on the
basis of the average of actual payments over the preceding two years) for the
unexpired portion of the notice period. Dr Rajagopal would also be entitled to
have his deferred pension from the UK senior executive pension scheme (a) calculated
with the inclusion of the unexpired portion of his notice period in the calculation
of
pensionable service; and (b) paid without actuarial reduction from age 55.
Mr
Masters has a contract dated 11 March 2005, effective from 1 March 2005, that
can be terminated by the company on 12 months notice. In the event of
early termination, the contract provides for the monthly payment of compensation
based on the value of salary, car benefit and bonus entitlement (calculated on
the basis of the average of actual payments over the preceding two years) for
the unexpired portion of the notice period. Should Mr Masters obtain alternative
employment during the period for payment of the monthly payments then each monthly
payment still outstanding would be reduced by the basic monthly remuneration
received
from his alternative employment.
Alternatively,
the contract also provides for the company to pay a lump sum termination payment
in lieu of the unexpired portion of the notice period instead of the monthly
termination payments. Such a payment would be equal to the base salary pro-rated
to the unexpired portion of the notice period. The unexpired portion of Mr Masters
notice period would be added to his pensionable service in the calculation of
his pension entitlement from the US Senior Executive Retirement Plan. His US
Cash Balance Retirement Plan and Savings Investment Plan benefits would be credited
with an amount equivalent to the amount the company would have
contributed during the unexpired portion of his notice period. His active participation
in the Cash Balance Retirement Plan and Savings Investment Plan would cease on
termination.
Mr
Ferguson has a contract dated 5 May 2005 that can be terminated by the company
on 12 months notice. In the event of early termination, the contract
provides for the monthly payment of compensation based on the value of salary,
car benefit and bonus entitlement (calculated on the basis of the average of
actual payments over the preceding two years) for the unexpired portion of the
notice period. Should Mr Ferguson obtain alternative employment during the period
for payment of the monthly payments then each monthly payment still outstanding
would be reduced by the basic monthly remuneration received from his alternative
employment.
Alternatively, the contract also provides for the company to pay a lump sum termination payment in lieu of the unexpired portion of the notice period instead
of the monthly termination payments. Such a payment would be equal to the base salary pro-rated to the unexpired portion of the notice period. Mr Ferguson would be entitled to a contribution to his personal pension plan or a cash amount in lieu of
his pay supplement for the unexpired portion of his notice period.
If
the contract is terminated within two years of his date of appointment, the company,
with Mr Fergusons agreement, has the discretion to make such
termination payments in one lump sum or on a monthly basis.
All
of the above contracts can be terminated by the individual director on six months notice.
Mr Walsh resigned from the board on 1 March 2005 and left the company on 31 March 2005. He received no severance payment. All of his long-term incentive plans
lapsed on his resignation.
Mr
Médori resigned from the board and left the company on 31 May 2005. He
received no severance payment. He was entitled to exercise one vested share option
which he was granted under the Executive Share Option Scheme 1995 within three
months of leaving the company. All of his other long-term incentives lapsed on
his resignation.
Shareholding guidelines
The remuneration committee encourages the executive management group to grow personal shareholding in the business over time. It is anticipated that each executive would build towards a
shareholding of one times salary. The remuneration committee believes that the vehicle of the long-term incentive arrangements will facilitate the building of such a shareholding over a period of time.
78 | The BOC Group plc Annual report and accounts 2005 | Report on remuneration |
Directors emoluments and compensation | |||||
Charged against profit in the year | 2005 | 2004 | |||
£000 | £000 | ||||
Salaries and benefits | 3,255 | 3,028 | 4 | ||
Annual bonuses payable for the year | 1,625 | 2,028 | |||
Share Matching Plan | 655 | | |||
Fees to non-executive directors | 508 | 458 | |||
6,043 | 5,514 | ||||
Company pension contributions to money purchase plans | 308 | 283 | |||
Provision for share incentive schemes1 | 875 | 1,011 | |||
Payments to former directors and their dependants | 32 | 31 | |||
7,258 | 6,839 | ||||
Individual remuneration | Year ended 30 September 2005 | 2004 | |||||||||||
Allowances | 2 |
Share | Total | ||||||||||
Basic | and | Bonus | Matching | remunera- | Total | ||||||||
salary/fees | benefits | payable | Plan | tion | remuneration | ||||||||
£000 | £000 | £000 | £000 | £000 | £000 | ||||||||
Chairman | |||||||||||||
R J Margetts | 251 | | | | 251 | 225 | |||||||
Executive directors | |||||||||||||
J A Bevan3 | 236 | 192 | 222 | 142 | 792 | 739 | 4 | ||||||
A E Isaac5 | 721 | 145 | 606 | 303 | 1,775 | 1,508 | |||||||
J K Masters3.6 | 175 | 323 | 124 | 62 | 684 | | |||||||
Dr K Rajagopal | 360 | 16 | 297 | 148 | 821 | 702 | |||||||
Non-executive directors | |||||||||||||
A R J Bonfield | 40 | | | | 40 | 39 | |||||||
G N Dawson | 46 | | | | 46 | 23 | |||||||
M F C Miau | 40 | | | | 40 | 39 | |||||||
R A McDonald6 | 10 | | | | 10 | | |||||||
Sir Christopher ODonnell7 | 50 | | | | 50 | 49 | |||||||
A C Quinn | 40 | | | | 40 | 17 | |||||||
Former directors | |||||||||||||
R Médori8.9 | 278 | 356 | 204 | | 838 | 1,008 | |||||||
J L Walsh3.8 | 178 | 275 | 172 | | 625 | 1,099 | 4 | ||||||
J M Baddeley8 | 21 | | | | 21 | 49 | |||||||
I J G Napier8 | 10 | | | | 10 | 17 | |||||||
Total | 2,456 | 1,307 | 1,625 | 655 | 6,043 | 5,514 | |||||||
1 | This represents the amount charged to operating profit for those elements of the various share incentive schemes relating to directors. |
2. | Allowances and benefits include car, fuel, medical insurance and international assignment benefits. The latter includes housing,utilities, home leave flights, education, relocation, shipping costs, and any other assignment allowances not covered in this indicative listing. |
3. | Mr Masters and Mr Bevan are international assignees, and Mr Walsh was an international assignee prior to his resignation. The pay of international assignees is managed under a tax equalisation programme funded by the company. This programme ensures that they are not penalised financially by accepting roles of an international nature which would result in higher taxation costs than would have been the case if they had remained in their home country, as in the case of Mr Walsh and Mr Masters, or benefit from a tax windfall as in the case of Mr Bevan. Mr Bevans basic salary/fees is set by reference to his UK notional salary of £342,000. |
4. | Total remuneration disclosed in the 2004 Report and Accounts did not include a correction for the tax associated with international assignments. |
5. | Mr Isaac was the highest paid director in 2005. |
6. | Mr Masters was appointed to the board on 1 March 2005 and Ms McDonald was appointed to the board on 1 July 2005. The remuneration above is the total remuneration earned since their appointment. |
7. | Fees in respect of Sir Christopher ODonnell are paid to Smith & Nephew plc. |
8. | Mr Médori, Mr Walsh, Ms Baddeley and Mr Napier resigned from the board on 31 May 2005, 1 March 2005, 28 February 2005 and 22 December 2004 respectively. The remuneration above is the total remuneration earned to their date of resignation. |
9. | The allowances and benefits of Mr Médori include a salary supplement of £84,000 (2004: £103,600) in respect of the pensions earnings cap. |
10. | The aggregate remuneration charged against profits for directors and members of the executive management board in the year was £10.5 million. Remuneration of members of the executive management board other than directors is given on page 79. |
11. | Mr Ferguson joined BOC on 15 September 2005 and was appointed a director on 30 September 2005. As such he was not remunerated as a director during the year. |
Report on remuneration | 79 | |
Executive officers The aggregate remuneration of members of the executive management board, other than directors, for services in all capacities during 2005 was as follows:
Charged against profit in the year | 2005 | ||
£000 | |||
Salaries, allowances and benefits | 1,606 | ||
Annual bonuses payable for the year | 899 | ||
Share Matching Plan | 393 | ||
Provision for share incentive schemes1 | 376 | ||
Company pension contributions | 4 | ||
3,278 | |||
Directors share interests at 30 September 2005 The directors of the company and their families had the following beneficial interests in the companys securities and rights under the share incentive schemes:
At 1 October 2004 | |||||||||||||||||
At 30 September 2005 | (or at date of appointment if later) | ||||||||||||||||
Long-term | Long-term | ||||||||||||||||
Ordinary | Share | Share | incentive | Ordinary | Share | Share | incentive | ||||||||||
shares | award | options | plan awards | shares | award | options | plan awards | ||||||||||
J A Bevan | 23,108 | | 301,107 | 150,186 | 17,108 | | 307,107 | 95,490 | |||||||||
A R J Bonfield | 1,772 | | | | 1,175 | | | | |||||||||
G N Dawson | 1,663 | | | | 892 | | | | |||||||||
A M Ferguson2 | | 48,077 | | 76,106 | | 48,077 | | 76,106 | |||||||||
A E Isaac | 8,057 | | 1,079,824 | 432,889 | 8,057 | | 1,129,824 | 279,387 | |||||||||
R J Margetts | 34,000 | | | | 34,000 | | | | |||||||||
J K Masters3 | 2,356 | | 240,726 | 78,469 | 1,856 | | 240,726 | 78,469 | |||||||||
R A McDonald4 | 500 | | | | | | | | |||||||||
M F C Miau | 4,044 | | | | 3,447 | | | | |||||||||
Sir Christopher | |||||||||||||||||
ODonnell | 2,364 | | | | 2,274 | | | | |||||||||
A C Quinn | 1,376 | | | | 779 | | | | |||||||||
Dr K Rajagopal | 21,816 | | 524,765 | 159,995 | 21,816 | | 549,765 | 102,432 | |||||||||
Former directors | |||||||||||||||||
J M Baddeley | | | | | 2,268 | | | | |||||||||
R Médori | | | | | 16,772 | | 442,496 | 107,312 | |||||||||
I J G Napier | 1,184 | | | | 779 | | | | |||||||||
J L Walsh | 22,175 | | | | 22,175 | | 477,412 | 102,432 | |||||||||
1. | This represents the amount charged to operating profit for those elements of the various share incentive schemes relating to executive officers. |
2. | Mr Ferguson was appointed to the board on 30 September 2005. |
3. | Mr Masters was appointed to the board on 1 March 2005. |
4. | Ms McDonald was appointed to the board on 1 July 2005. |
There has been no change in the interest of any of the directors between 1 October 2005 and 12 November 2005.
No director had a non-beneficial interest at 30 September 2005 or between 1 October 2005 and 12 November 2005. Options are granted over Ordinary shares of
25p each under senior executive and general employee share option schemes.
Apart from the above and service agreements, no director has had any material interest in any contract with the company or its subsidiaries requiring
disclosure under the Companies Act 1985.
At
30 September 2005, members of the executive management board, other than directors,
had the following aggregate beneficial interests in the companys
securities: 4,421 Ordinary shares; 819,077 share options and 322,694 long-term incentive plan share awards. The cumulative shareholdings of the companys directors and members of the executive management board represent less than one per cent of
the companys outstanding Ordinary shares.
80 | The BOC Group plc Annual report and accounts 2005 | Report on remuneration |
Directors share interests movements during the year | ||||||||||||||||||||
Share options | ||||||||||||||||||||
At 1 October 2004 (or at date of appointment if later) |
Granted | Exercised | Lapsed | At 30 September 2005 |
Exercise price pence |
Opening market price at date of exercise pence |
Earliest exercise date |
Latest exercise date |
Notes | |||||||||||
J A Bevan | ||||||||||||||||||||
6,000 | | (6,000 | ) | | | 722 | 985 | |||||||||||||
10,000 | | | | 10,000 | 919 | 14/02/99 | 13/02/06 | c. | ||||||||||||
10,000 | | | | 10,000 | 980 | 21/02/00 | 20/02/07 | c. | ||||||||||||
10,000 | | | | 10,000 | 914 | 11/02/01 | 10/02/08 | c. | ||||||||||||
30,000 | | | | 30,000 | 894 | 18/11/01 | 17/11/08 | c. | ||||||||||||
45,000 | | | | 45,000 | 937 | 26/05/03 | 25/05/10 | c. | ||||||||||||
35,000 | | | | 35,000 | 993 | 07/02/04 | 06/02/11 | c. | ||||||||||||
55,000 | | | | 55,000 | 1016 | 06/02/05 | 05/02/12 | c. | ||||||||||||
67,654 | | | | 67,654 | 776 | 06/02/06 | 05/02/13 | c. | ||||||||||||
36,574 | | | | < |