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Bunzl PLC (BNZL)

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Tuesday 17 May, 2005

Bunzl PLC

Filtrona Demerger - Part III

Bunzl PLC
17 May 2005


PART III OF III

The following is a more detailed description of the Filtrona business:

INFORMATION ON FILTRONA

1. Overview

Filtrona is a business area of Bunzl plc, a UK listed, FTSE 100 Support Services
company with a market capitalisation of approximately £2.3 billion. It is an
international, market leading speciality plastic and fibre products supplier
which is segmented into Plastic Technologies and Fibre Technologies, each
contributing similar levels of profits to Bunzl. Plastic Technologies produces,
sources and distributes protection and finishing products, self-adhesive tear
tape and certain security products as well as proprietary and customised plastic
extrusions and packaging items for consumer products. Fibre Technologies focuses
on the production and supply of special filters for cigarettes and bonded fibre
products such as reservoirs and wicks for writing instruments and printers,
household products and medical diagnostic devices. Filtrona believes that many
of the markets and segments within which it operates have the desirable
combination of good growth potential and robust defensive qualities.

Across these niche international markets, Filtrona has a number of market
leading blue chip customers including Altria (Philip Morris), Boeing, British
American Tobacco, Carlsberg, General Electric, General Motors, Hewlett Packard,
Nestle, Newell Rubbermaid, Reckitt Benckiser and Unilever. Filtrona's emphasis
on value addition through innovation, quality and service underpins these long
standing customer relationships.

Filtrona is a well invested global business, headquartered in the UK, with 40
manufacturing facilities, 32 distribution outlets and sales offices and three
research facilities, spread across 22 countries in the Americas, Europe and
Asia. Filtrona employs some 5,200 people and its international senior management
team comprises nine individuals who have an average experience in the business
of nearly 10 years.

In 2004 under UK GAAP, Filtrona generated annual sales of £477.5 million (2003:
£452.6 million), EBITDA of £74.3 million (2003: £71.3 million) and operating
profit before goodwill amortisation of £54.2 million (after allocation of Bunzl
corporate costs) (2003: £51.1 million). Plastic Technologies generated sales of
£241.5 million (2003: £224.1 million) and operating profit before goodwill
amortisation of £33.8 million (2003: £28.6 million) with an EBITA margin of 14%.
Fibre Technologies generated sales of £236.0 million (2003: £228.5 million) and
operating profit before goodwill amortisation of £27.8 million (2003: £31.1
million) with an EBITA margin of 12%. Of the total sales in 2004, approximately
43% originated from Europe, 39% from North America and 18% from the rest of the
world. As at 31 December 2004, Filtrona had net operating assets of £261.2
million and net debt of £120.0 million.

2. History

Filtrona's strong competitive position has been developed over the last 10 years
through significant investment in new global production and service
capabilities. Significant new facilities have been established in China (Plastic
and Fibre Technologies), India (Plastic Technologies), Mexico (Plastic and Fibre
Technologies), the US (Plastic and Fibre Technologies) and Venezuela (Fibre
Technologies) ensuring that Filtrona is better able to supply its multi-national
customers and target growth from developing economies. Joint ventures have also
provided the filters business with access to the growing markets of the Middle
East and central Asia and, more recently, joint ventures have been established
in Plastic Technologies relating to the supply of roll-on deodorant balls in
Brazil and patented track and trace technology in coated and security products.
A number of complementary niche businesses have also been acquired enhancing
Filtrona's product offering and geographical reach, including:

  (i)   the entry in 1996 into the self-adhesive tear tape market
        through the acquisition of Payne for debt free consideration of £43.2 million;

  (ii)  the addition of significant extra filter and bonded fibre
        technology and capacity in the US by the acquisition of American Filtrona
        Corporation in 1997 for £83.1 million (net of cash). This acquisition also added
        a significant extrusion business in the US to Filtrona's existing Plastic
        Technologies business and united the Filtrona brand name, which had not
        previously been available for use by Bunzl in the US;

  (iii) the acquisition in 1998 of Enitor, a leading Dutch extruder
        with annual sales prior to acquisition of €16 million;

  (iv)  the purchase in 2000 of Davidson Plastics, a profile extrusion
        operation located in the US which had annual sales prior to acquisition of US$22
        million, and Pexco, a specialist medical tubing extruder, which had annual sales
        prior to acquisition of US$7 million;

  (v)   the acquisition in 2003 of Baumgartner Fibertec, a Swiss
        based business engaged in the development, manufacture and supply of cigarette
        filters and capillary reservoirs which, prior to acquisition, had annual sales
        of CHF40 million; and

  (vi)  the purchase in 2004 for £19.2 million (debt free) of the
        Skiffy Group, based in the Netherlands, which provided expertise in the
        manufacture and supply of small nylon parts for protection and finishing
        applications and a significant additional number of potential new customers for
        the existing Plastic Technologies product range.

3. Products and end markets

3.1 Protection and finishing

(a) Products

Filtrona's protection and finishing products business is an international
sourcing and supply group, sourcing a wide range of products and tooling,
particularly from Asia, to supplement its own production of injection moulded
and dip moulded vinyl products for general protection, electrical, fastening and
finishing applications. It operates in Europe through its Moss Plastic Parts and
Skiffy brand names, and in the US through Alliance Plastics and Moulding
Specialists.

These predominantly plastic components are low value but are critical to
customers delivering their final product. Filtrona's position as a leading
supplier in this fragmented substantial market is based on excellent service and
a broad product offering.

Production facilities are located in the UK, the Netherlands, Mexico, the US and
Brazil, with some 300 injection moulding machines. Filtrona has a broad
industrial customer base, with over 59,000 customers in Europe and the Americas,
including a large number of blue chip customers such as Carlsberg, General
Motors and Parker Hannifin. No one customer represents more than 3% of turnover.

(b) Markets

Protection and finishing products include plugs and caps for holes, threads,
corners, pipes and flanges which are used to protect customers' products during
transit, processing and finishing. The market for such products is fragmented,
with end users including the automotive, general engineering, white goods,
pneumatics, hydraulics and oil and gas industries.

The products within the electrical range protect, space, restrain, insulate and
position wires for a number of end markets, including capital goods, automotive,
white goods and lighting. Fasteners include nylon rivets, latches, clips,
washers, spacers and bushes and are also used in similar end markets.

Finishing components are used for adding functionality and completing tubular
and extruded products. Typical applications include office or school furniture,
hospital equipment, commercial catering equipment, machinery and cabinets.

The market for protection and finishing products is highly fragmented with many
smaller competitors based in North America and Europe. Filtrona believes that
none of these competitors can offer either the range or international supply
capability of Filtrona.

(c) Sources of differentiation

The breadth of the customer base is a key strength of the business. Filtrona
believes few competitors have the scale and supply chain competence to service
economically so many customers with such an extensive range and that its
distribution network, advanced IT systems and logistics capability provide real
differentiation in the protection and finishing market.

Filtrona believes that, given the critical nature of these low cost components,
the breadth of product offering and quality of service are also key
differentiators. Filtrona's wide product range and quality of service are
supported by an extensive library of approximately 20,000 moulds, catalogues in
nine languages, 35,000 SKUs and a global logistics and manufacturing capability.
Filtrona also uses sophisticated business to business marketing techniques to
drive high rates of new customer acquisition.

(d) Growth drivers

Management is pursuing growth through continued investment in supply chain
logistics and IT, as well as extending geographic coverage and the range of
products offered. Filtrona's sourcing capability is growing rapidly for both
finished products and tooling and a new representative office has just been
established in China, located at the Filtrona Fibertec Ningbo facility.

Furthermore, given the fragmentation of the market, Filtrona believes there is
ample scope for further selective value enhancing acquisitions.

3.2 Coated and security

(a) Products

Filtrona, under the brands Payne, Morane and Laminex, provides self-adhesive
tear tape, coated film products and identity systems, cards and accessories. It
has locations in the UK, US, Brazil, Germany, France, Spain, India, Indonesia
and Singapore. Filtrona is in the process of consolidating the brands under the
name of Payne. Filtrona also has a joint venture which owns patented technology
for individual item level track and trace, otherwise known as ''pack DNA''.

Filtrona has pioneered the tear tape industry move away from wax tear tape to
self-adhesive tape, which offers more efficient processing to its customers.
Filtrona is now the global market leader in self-adhesive tear tape for easy
opening, brand communication and security applications. Filtrona supplied over
29 million kilometres of tear tape in 2004 and has strong relationships with
blue chip customers including Altria (Philip Morris), British American Tobacco,
Kraft, Nestle and United Biscuits.

Through its brand Morane (to be rebranded as Payne Coated Film Products),
Filtrona supplies coated film products for encapsulation, lamination, industrial
and document security applications. Over the last 30 years, Filtrona has been
supplying the film to create unique national identity cards, national voting
cards and printed security passports for governments and agencies worldwide.

Under the Laminex brand (to be rebranded Payne Security), Filtrona supplies
identity systems, cards and accessories for security, health and safety and
promotional use.

Filtrona believes that FractureCode (its joint venture based in Denmark), which
is currently undergoing a major trial with a leading blue chip consumer products
company, is expected to become a high growth business. FractureCode has the
potential to add value where customers require identification of items to an
individual item level for track and trace and security applications.

(b) Markets

Tear tape is a product which allows consumers to open product packaging easily.
It also provides a promotional medium for marketing to consumers and can carry
various anti-counterfeit features.

The tear tape market is split between wax tear tape and self-adhesive tear tape.
Wax tear tape requires the tape to be passed through a molten wax bath before
being applied to the packaging medium. Self-adhesive tear tape requires no wax
to adhere to the packaging, is faster to apply and results in lower machine
downtime compared with the wax alternative.

The higher volume tear tape customers are to be found in the tobacco industry,
which has recognised the easy opening ability of tear tape. Certain customers
have taken advantage of the use of tear tape as a brand promotion tool and as a
medium to carry anti-counterfeit security measures effectively.

Further market growth is dependent upon Filtrona persuading fast moving consumer
goods customers (who specify the type of packaging for their product) of the
benefits that tear tape can bring to their products.

A variety of other products form the balance of the coated and security product
portfolio. Items range from plastic sheet for laminating documents and simple
PVC cards to higher value-added security documents and card identification
systems.

Filtrona expects the market for individual item identification to grow rapidly,
as is evidenced by the growth in RFID (radio frequency identification) chip
applications. FractureCode is an individual item system which does not involve
the high cost of an electronic chip and can be printed onto standard product
packaging, including tear tape, labels and cartons.

In the tear tape market Filtrona's competitors are principally suppliers to the
tobacco industry.

Competition in coated film products comes from a variety of European and US
based manufacturers, with low priced competition from Korea and China.

(c) Sources of differentiation

Within the tear tape market, Filtrona seeks to differentiate itself from the
competition through technology, innovation and its global supply infrastructure.
Since pioneering self-adhesive tear tape, Filtrona has sought to maintain its
technological advantage over the competition, both in terms of materials and
processes. Recent innovations include the development of printing technology
that significantly improves brand security and customer communication. Filtrona
believes that the FractureCode track and trace technology is unique and can also
be integrated into tear tape and other packaging media to provide further added
value to customers.

Filtrona's global infrastructure provides a low cost, flexible source of supply
as well as penetration into higher growth emerging markets.

As a leading UK supplier of coated films for document encapsulation, the Morane
business is highly regarded for its high quality, comprehensive range and
excellent service level. Laminex is well regarded for its robust software and
its highly efficient identity card bureau service.

(d) Growth drivers

Filtrona expects the self-adhesive tear tape market to grow over the next few
years, driven by enhanced usage for easy opening in consumer goods applications
outside the tobacco industry, particularly in the US, and for enhanced brand
protection and security within the tobacco industry. Filtrona is well positioned
to benefit from this trend, not only as the market leader with an international
presence, but also through its combination of proprietary materials and printing
technology. Developments in digital print technology will also open up
opportunities for the printing of unique sequential numbers or codes onto tear
tape which can be used for consumer promotions.

The increasing focus on document security (e.g. drivers' licences, visas and
passports) will enable the coated film products business to continue to develop
value-added applications and Filtrona expects the identity card market to
continue its growth path.

Filtrona believes that FractureCode is a new product and that the market has
potential for strong growth.

3.3 Plastic profile and sheet

(a) Products

Filtrona is a leading supplier in the US and the Netherlands of extruded
thermoplastic profiles, sheet and speciality tubes in its chosen product
categories. The products are proprietary and custom made to exacting customer
standards and are used for a wide range of applications such as lighting,
fencing, transportation, point of sale displays, refrigeration, medical
supplies, aerospace, and traffic control.

(b) Markets

Lighting products include thermoplastic lens wraps and sheet for fluorescent
tube lighting for commercial, industrial and public sector applications.
Filtrona is a leading supplier of these items in the US and Mexico.

Transportation products are made for aerospace and automotive customers. For
example Filtrona's extruded profiles can be found inside the passenger cabins on
many of Boeing's commercial aeroplanes. Filtrona also supplies extrusions which
help in the positioning of passenger safety restraint systems. This market is
growing as car manufacturers are increasingly offering multiple airbags as
standard on their vehicles.

Filtrona is the leading US supplier of inserts for chain link fencing. This
market has displayed growth assisted by the added emphasis on securing premises
under the homeland security programme. Filtrona's national supply capability is
critical to success in this market.

In the medical sector, Filtrona is an extruder of high quality medical tubes
used in surgical procedures. Filtrona's customers are increasingly requiring
extra value-added features to be supplied along with the standard extruded
medical tubing. This includes secondary coiling, banding, solvent bonding and
packaging, which Filtrona is well placed to supply, both technically and
geographically.

Filtrona supplies the point of sale products that are used in store to hold the
pricing information in place on the shelf and also delivers the high response
levels expected by retailers to support their promotional campaigns. In the
point of sale sector, major retailers are re-branding and updating their images
and stores with the trend moving towards the opening of more ''super-centre''
type locations. Filtrona conducted a survey in September 2003 which estimated
the size of this market for all plastic purchases at US$5.0 billion in the US.
In both the US and the Netherlands, Filtrona has a particularly strong position
in the scanning profile market where the expertise in multiple polymer extrusion
is critical to success.

Filtrona's chosen markets are fragmented. The profile market, which represents
over 90% of sales, is highly fragmented and is made up of much smaller local
suppliers.

(c) Sources of differentiation

Filtrona benefits from economies of scale compared with its smaller, more local
competitors, both in terms of its cost base and in terms of service, exemplified
by its multi-point supply. In addition, investment in sophisticated IT systems
enables it to manage its business and its customer relationships efficiently.

Filtrona has built up relationships with key blue chip customers in this market,
including Boeing, General Electric, Hussman and Wal-Mart.

(d) Growth drivers

Management are driving growth through focusing on development of proprietary
niche products and technologies in growing segments such as transportation,
medical supplies and point of sale displays.

3.4 Consumer packaging

(a) Products

In its consumer packaging business, Globalpack, Filtrona has a market leading
position in the Brazilian market as a producer of packaging for toiletries and
cosmetic items. Based in Sao Paulo, Globalpack supplies containers, tubes,
closures and, through its joint venture Euro-Matic Filtrona, roll-on balls to
the market leading producers of deodorant and cosmetic products.

(b) Markets

Globalpack serves blue chip customers such as Avon, Johnson & Johnson, Natura
and Unilever and has a unique position derived from the high level of innovative
solutions provided to its customers. Globalpack supplies packaging using a range
of processes including injection moulding, blow moulding, extrusion and printing
and, as such, offers a full service range to its principal customers.

Globalpack, through Euro-Matic Filtrona, is the market leading supplier of
roll-on deodorant balls in Brazil. This joint venture, combined with
Globalpack's capability in producing bottles, housings and caps, has positioned
it as the leading supplier of roll-on deodorant packaging in the Brazilian
market.

The principal competitors to Globalpack are privately owned Brazilian companies
and divisions of larger packaging groups.

(c) Sources of differentiation

Globalpack is the only Brazilian supplier with the capability to produce a full
roll-on deodorant packaging set (i.e. container, ball, housing and cap). It has
a full print capability for the decoration of tubes and containers and is known
for innovation and quality.

(d) Growth drivers

The Brazilian cosmetics and toiletries market continues to expand with
consumers' disposable incomes. Globalpack will continue to drive growth through
the innovative new packaging formats it is able to offer the blue chip cosmetics
and toiletries suppliers, both in Brazil and in the surrounding region.

3.5 Cigarette filters

(a) Products

Filtrona produces a wide range of filters from monoacetate to multi-segment
special filters with novel mouthpieces and sophisticated adsorbent materials.
Filtrona's special filters provide its customers with an opportunity to
differentiate their products in the market relative to its competitors.

Fibre Technologies, with over 50 years of experience in the industry, is the
largest independent producer of special filters for the cigarette market. It
supplies cigarette filters to, among others, the top four global cigarette
manufacturers, Altria (Philip Morris), British American Tobacco, Imperial
Tobacco and Japan Tobacco International, which together represent some 44% of
the cigarette market.

Filtrona has a relatively low share of the monoacetate market, as the larger
tobacco companies tend to self-manufacture. Filtrona supplies cigarette filters
into this market where multi-national customers require additional capacity or
flexible production runs and to smaller independent cigarette manufacturers who
do not wish to add complexity to their business. However, Filtrona believes the
key area of differential advantage in its business is the supply of special
filters.

Cigarette filter specifications are individual to brands, blends and
manufacturers and are created to fulfil identified market niches. Filtrona's
strategically positioned, well invested manufacturing facilities in 14 locations
around the world ensure that filters are delivered in a timely and cost
effective way to fulfil customer needs.

(b) Markets

The market for cigarette filters includes monoacetate filters and special
filters.

Monoacetate filters are manufactured from paper wrapped cellulose acetate tow.
Cellulose acetate tow is a white, virtually tasteless filling material which is
bonded with a plasticiser.

In special filters, additives like carbon or menthol are combined with a
monoacetate filter to change the taste of the cigarette smoke and the
performance of the filters. Multiple filter sections can be combined together,
with additives, to form a multi-segment filter, or the monoacetate filter can
itself be modified to alter performance of the filter.

Filtrona estimates that standard monoacetate filters account for approximately
88% of the cigarette filters market, with special filters accounting for the
remaining 12%. The special filters share has grown from 11.7% of filtered
cigarettes in 2003 to 12.2% in 2004.

The principal competition for Filtrona is from cigarette companies choosing to
manufacture their filters in-house. Filtrona believes that its expertise,
technology, innovation, low cost production footprint and high quality customer
service offers an advantage over self-manufacture of special filters and this
has been recognised by the major tobacco manufacturers who source from it. While
occasionally some volume is taken back in-house by its customers, historically
Filtrona has been able to offset these movements through new outsourced business
from within its current customer base.

(c) Sources of differentiation

A global footprint is an important source of differentiation within the special
filters market. Filtrona has operations in 14 locations spread across the world,
with two in the US, one in Mexico, three in South America, four in Europe and
four in the Middle East and Asia. This provides a low cost, flexible source of
supply as well as important penetration into the higher growth emerging markets.

Technology, innovation and manufacturing flexibility are also important
differentiators in the cigarette filters market. Filtrona's commitment to
research and innovation is underlined by the operation of the Technology Centre
in the UK. The Technology Centre was designed to bring together laboratory
services, product development, materials testing and process engineering in one
facility. Together these disciplines help Filtrona to research and source the
best available materials and develop filter production techniques for use in its
plants throughout the world.

(d) Growth drivers

Filtrona's multi-national tobacco customers require Filtrona to supply special
filters to support their brands in their chosen end use markets, but
particularly in Russia, Japan, South Korea and Venezuela, where special filters
have either a leading or rapidly growing market share. Filtrona provides a
flexible service that can support the strong growth profile that a successful
brand requires.

Filtrona customers also recognise the expertise that Filtrona has in the supply
of special filters and are increasingly looking to outsource production in
return for a simplification of their business and a reduction in their total
costs.

Cigarettes with multi-segment filters are expected to account for a growing
share of the future cigarette market. Filtrona is ideally placed to offer such
filters to its global customer base and Filtrona believes that this represents a
significant future opportunity.

3.6 Bonded fibres

(a) Products

Filtrona, under the Fibertec brand, supplies bonded fibre structures for use as
functional components in consumer and industrial products including those shown
in the table below. The facilities for the bonded fibre products are located in
Richmond, Virginia (US), Reinbek (Germany) and Ningbo (China), although the
markets for these products are global.

Filtrona believes that it is the market leader in its primary market of bonded
fibre ink reservoirs for high quality roller ball and fine liner pens, markers
and highlighters. From this base Filtrona has expanded into wicking, filtration
and absorptive components for medical devices, absorptive media and ink transfer
wicks for inkjet printers, ink cartridges and other imprinting machines. It is
also growing strongly in household product applications for bonded fibres, such
as air fresheners and insect repellents.

The table below shows some of the applications for Filtrona's core competence of
capillary transfer science, as well as the key products for which Filtrona
supplies components.

Product categories                  Applications

Writing instruments                 Roller ball pens
                                    Fine liner pens
                                    Markers
                                    Highlighters

Printing systems                    Ink transfer wicks for inkjet printers
                                    Cartridges for inkjet printers
                                    Other imprinting machines

Medical devices                     Diagnostics - detection of disease and conditions
                                    Life Sciences - bench top research in DNA/RNA
                                    Biotechnology - downstream processing
                                    Medical - directly treating or managing conditions

Household products                  Air fresheners (bathroom, aromatherapy, cars)
                                    Insecticide/repellent dispensing (electrically heated)

(b) Technology

Capillary transfer science is the basis for many of the performance features and
product functions of Filtrona's bonded fibre products. Capillary action is the
means by which fluid moves through porous channels within a medium due to
surface tension.

Knowledge of the properties of the relevant fluid as well as the media substrate
enables Filtrona to model capillary behaviour and to design bespoke transfer
systems for a wide array of applications.

Filtrona has invested heavily in process equipment to lower the unit cost of
production and is planning to relocate some of this equipment to China to
exploit the regional market.

Bonded fibre products are highly adaptable to meet fluid transfer and storage
requirements. Selection of a given fibre composition and structure can be made
to optimise function and fit.

Bonded fibre products can provide one way or two way fluid transfer. A reservoir
for printer cartridges, for example, must be able to be quickly filled, safely
contain ink without leakage and release on demand over the product life cycle.

Bonded fibre products may also serve as wicks, transferring fluids from one
substrate to another using capillary action.

(c) Markets

In Western Europe and North America, the market for ink reservoirs is relatively
mature. However in the new developing economies in Asia and the Far East, ink
reservoirs represent a growth market in which Filtrona has a strong position.

Filtrona's assessment of the competition in the medical and household products
markets is that it stems from alternative solutions rather than alternative
fibre component suppliers.

(d) Sources of differentiation

Filtrona believes that long term investment in capillary fibre research has
yielded industry leading technology and Filtrona is recognised as a leading
innovator in the continuous bonding of fibres. Since its foundation in 1954, the
business has patented more than 60 products in the US alone. This emphasis on
focused innovation is a key differentiator in this market. Filtrona has a truly
international supply position with customers on every continent supplied from
Filtrona Fibertec's existing European and US facilities and its new Chinese
operation. Filtrona believes that no other competitor can match Filtrona
Fibertec's global reach and service level.

(e) Growth drivers

Growth is driven both through a combination of product innovation and expanding
the use of existing technologies to provide new applications such as wicks and
reservoirs for in vitro medical devices where Filtrona is now a leading
provider. The new product development pipeline contains a number of significant
products and applications in ink reservoirs, medical diagnostics, medicine
dispensing and diesel filtration.

The new Filtrona Fibertec facility in Ningbo, China offers a dual benefit of
being a low cost source of production as well as providing access to a growing
local market.

4. Joint ventures

4.1 Plastic Technologies

In 2000 Globalpack, Filtrona's consumer packaging business in Brazil,
established a joint venture with Euro-Matic, a leading international
manufacturer of plastic balls for a variety of applications, in order to
manufacture and supply roll-on deodorant balls. Combined with Globalpack's
ability to produce bottles, housings and caps, Euro-Matic Filtrona has helped
position Globalpack as the leading supplier of roll-on deodorant packaging in
the Brazilian market.

In 2002 Filtrona established a Danish based joint venture, FractureCode
Corporation with ITO Technologies, in order to develop a new technology in
conjunction with Filtrona's existing self-adhesive tear tape business Payne.
FractureCode is a patented process which can apply a unique identifying mark to
tear tape or other packaging media with a randomly printed code, which enables
customers to mark their products individually in such a way that they can be
tracked throughout the distribution chain. It can also be used as a brand
authentication device as it is very difficult to replicate. Initial trials of
FractureCode, which has not yet been used in commercial production, have been
encouraging.

4.2 Fibre Technologies

Most of Filtrona's cigarette filters businesses are wholly-owned. However the
filter businesses in Thailand, India and Jordan are operated through joint
venture companies Filthai Company Limited, ITC Filtrona Limited and Filtrona
Jordan respectively. Based in Bangkok, Filthai was established in the 1970s and
manufactures and supplies monoacetate and special filters principally to the
Thai market. ITC Filtrona was formed in 1993 in Bangalore to supply monoacetate
filters to the local Indian market. Filtrona Jordan was set up in 1995 and is
based near Amman, from where it manufactures and supplies monoacetate filters
for both the local domestic market and exports. Together these companies
accounted for less than 10% of Filtrona's total cigarette filter sales in 2004.

5. Summary financial information

5.1 Trading information

The table below summarises the trading record of Filtrona for the three years
ended 31 December 2004.

                            Year ended 31 December
                            ----------------------------------------------------
                            IFRS           UK GAAP       UK GAAP       UK GAAP
                            2004            2004          2003          2002
                            --------        --------      --------      --------
                            £m              £m            £m            £m
By business segment
Sales:
 Plastic Technologies       241.5           241.5         224.1         224.1
 Fibre Technologies         236.0           236.0         228.5         218.3
                            --------        --------      --------      --------
Total                       477.5           477.5         452.6         442.4
                            ========        ========      ========      ========

Operating profit *
 Plastic Technologies       33.2            33.8          28.6          28.2
 Fibre Technologies         23.9            27.8          31.1          29.2
 Corporate activities       (7.5)           (7.4)         (8.6)         (9.4)
                            --------        --------      --------      --------
Total                       49.6            54.2          51.1          48.0
                            ========        ========      ========      ========

By geographical origin**
Sales:
 Europe                                      203.2         183.7         171.0
 North America                               187.8         193.2         202.1
 Rest of the world                           86.5          75.7          69.3
                                            --------      --------      --------
Total                                        477.5         452.6         442.4
                                            ========      ========      ========

Operating profit *
 Europe                                      23.2          21.8          20.8
 North America                               22.6          24.3          24.4
 Rest of the world                           15.8          13.6          12.2
 Corporate activities                        (7.4)         (8.6)         (9.4)
                                            --------      --------      --------
Total                                        54.2          51.1          48.0
                                            ========      ========      ========

* Before goodwill/intangible amortisation
** Disclosure not required under IAS 14

5.2 Profit and loss - by business segment

(a) Plastic Technologies

Plastic Technologies sales were flat in 2003 compared with 2002 and grew by 7.8%
in 2004 (at constant exchange rates, 4.3% and 14.7% respectively). 2004
benefited from nine months of the Skiffy acquisition. The organic sales growth
in 2004 at constant exchange rates was 11.3%.

On a UK GAAP constant exchange rates basis, operating profit before goodwill
amortisation increased by 6.3% in 2003 and increased by 25.7% in 2004. The
acquisition of the Skiffy business was projected at the time of acquisition to
contribute £l.8 million in 2004. Filtrona's post-acquisition focus has improved
Skiffy's profit to £2.3 million in 2004. Organic operating profit before
goodwill growth at constant exchange rates for Plastics Technologies on a UK
GAAP basis was 19.0% in 2004. The return on sales improved as a result of the
increased focus on current and new proprietary product ranges within Plastic
Technologies.

(b) Fibre Technologies

Fibre Technologies sales grew by 4.7% in 2003 and 3.3% in 2004 (at constant
exchange rates, 6.9% and 9.7% respectively). 2004 benefited from the full year
effect of the Baumgartner Fibertec acquisition which contributed sales of £15.7
million in 2004, compared with £3.3 million for the three months in 2003.
Excluding the impact of acquisitions, organic sales growth at constant exchange
rates was 5.2% in 2003 and 4.0% in 2004.

On a UK GAAP constant exchange rates basis operating profit before goodwill
amortisation increased by 9.0% in 2003 and fell by 4.1% in 2004. The 2004
reduction in operating profit was due to price positioning both in advance of
volume growth and lower cost manufacture as well as the Baumgartner Fibertec
business, which was loss making on purchase but achieved breakeven in 2004.

5.3 Profit and loss - by geographical origin

Both Plastic Technologies and Fibre Technologies operate throughout the world.
Sales to the rest of the world segment (i.e. excluding Europe and North
America), which include many of the lower cost manufacturing regions, have grown
as a proportion of the whole from 15.7% in 2002 to 18.1% in 2004.

5.4 Corporate activities

Corporate activities include the Filtrona business area central costs and a
proportion of Bunzl's central costs allocated on a basis reflecting the
proportion of those resources consumed by Filtrona. Filtrona believes that the
level of central costs in 2004 is representative of the resources required to
run an independent public company.

5.5 Cash flow and return on capital

                            Year ended 31 Decmeber
                            ----------------------------------------------------
                            IFRS             UK GAAP       UK GAAP       UK GAAP
                            2004             2004          2003          2002
                            --------         --------      --------      -------
                            £m                £m            £m            £m
Operating profit (Note 1)   49.6              54.2          51.1          48.0
Trading cash flow (Note 2)  30.7              30.7          44.4          36.4
Cash conversion rate        62%               57%           87%           76%
Capital employed            209.4             209.4         193.6         197.0
Return on capital employed  23.7%             25.9%         26.4%         24.4%


Notes
1         Operating profit is stated before charging interest, taxation and
          goodwill/intangible amortisation.
2         Trading cash flow is net cash inflow from operating activities less
          net cash outflow for capital expenditure.

5.6 Cash flow

Under UK GAAP the cash conversion rate averaged 73% over the last three years.
In 2004 net capital expenditure increased by £9.1 million to be £13.3 million in
excess of depreciation to invest in new facilities in Mexico and China to
support the exploitation of new business opportunities. Working capital
increased by £9.4 million in 2004 to support business growth and service
enhancements through local stock availability of existing and new products.

5.7 Return on capital

Inventory has increased throughout the period to support business growth and
service enhancements through local stock availability of existing and new
products. Debtors' average payment days increased from 47 to 49 days reflecting
longer supply chains and growth in export markets with longer payment terms.
Return on capital employed moved forward in 2002 and 2003 before dipping
slightly in 2004. This was due to price positioning in Fibre Technologies in
advance of both volume growth and lower cost manufacture, as well as the impact
of the Baumgartner Fibertec acquisition, although partially offset by strong
proprietary product growth in Plastic Technologies.

6. Strategy and execution

6.1 Overview

Filtrona's strategy is to continue to grow profitably through investing
organically and by acquisition in selected niche international markets within
Plastic Technologies and Fibre Technologies. Within each business segment it is
continually seeking to enhance its competitive position through product
innovation, strengthen its sourcing and distribution capability, expand and
adapt its global footprint to enhance its supply chain and reduce cost and
invest in IT, people and production capability to deliver superior customer
service and value.

6.2 Enhance competitive position through innovation

Filtrona believes that its robust competitive positions will be enhanced through
the continued development of its product offering both from own manufacture and
external sources. In each of the lines of business there will continue to be
focus on product innovation and range development. In some of the businesses
this will be driven by the established research and development functions and in
others by further developing product management and sourcing functions.

Historically Filtrona has been able to use established locations within one line
of business to offer rapid, low cost market entry for other businesses through
overhead sharing. There are many examples of this within Filtrona, such as tear
tape operations in cigarette filters and bonded fibres facilities, enabling the
exploitation of new opportunities and servicing customers more quickly and cost
effectively than competitors can achieve. This approach will continue as a key
component of enhancing competitive positions rapidly.

6.3 Expand and adapt the global footprint to improve supply chain and reduce
cost

Filtrona has a comprehensive production and distribution footprint which can be
flexed to respond to customers' needs, whether they be product, cost or supply
chain driven. Filtrona has a well invested machinery base that is flexible and
relocatable. The current manufacturing locations are:

  (i)   Americas - Brazil, Mexico, Paraguay, US and Venezuela;

  (ii)  Europe - France, Germany, Italy, the Netherlands, Switzerland and the 
        United Kingdom; and

  (iii) Middle East and Asia - India, Indonesia, Jordan, Thailand and
        a recently completed facility in China.

The recent investment by the filters business in Monterrey, Mexico was assisted
by the prior experience that Filtrona had developed from the plastic profile and
sheet business that has operated there since 2000.

Similarly the recent investment in the Chinese facility is expected to
accelerate the growth not only of the bonded fibre business but also the
protection and finishing and the coated and security businesses in China.

6.4 Reduce production costs

Filtrona seeks to reduce its production costs through a combination of:

  (i)   standardisation of operating policies and procedures
        including health and safety, environment and human resources;

  (ii)  standardisation of production equipment and information
        systems;

  (iii) continued investment in a competitive manufacturing base with
        the latest high output machinery and tooling located in low unit labour 
        cost locations; and

  (iv) a lean organisation with competent, well trained and
       experienced people.

6.5 Continue to enhance supply chain capability

Filtrona seeks to achieve supply chain and service excellence to add increased
value to customers. Recent examples of this process are the opening of new
warehousing arrangements in Russia and Korea to serve cigarette filter customers
in these markets more effectively. These arrangements have not only facilitated
just-in-time supply, they have also enabled customers to reduce inventories and
to avoid the administration associated with importing products.

Filtrona will continue to build its distribution capability and geographic
spread to assist growth. The recent opening of a new protection and finishing
products distribution centre to serve the Czech Republic market follows on from
the successful establishment of a distribution centre in Poland.

IT investment will continue to play a critical role in service enhancement. The
enterprise resource planning packages in place have delivered significant
improvement from the application of new technologies in areas such as finite
scheduling and bar coding and business relationship management modules are in
the process of implementation.

6.6 Selective acquisitions

Filtrona has made a number of selective acquisitions which have either
strengthened a core competence, added geographic scale, brought new products
into the portfolio or a combination of all three. There continues to be a number
of acquisition targets which Filtrona believes could supplement its underlying
growth rate, and Filtrona plans to recruit a corporate development executive to
increase the focus on this activity.

7. Sales, marketing and purchasing

The sales, marketing and purchasing teams in Filtrona are based in the operating
businesses and report through the senior management executive. Filtrona believes
it is critical to maintain this commercial focus within each line of business.

In Plastic Technologies larger customers are served by a key account structure.
Smaller customers are reached through the marketing programme and a rapid sample
service. Ultimately they are served by efficient telesales, internet or fax
order entry.

In Fibre Technologies the relatively large size of the customers supports a key
account approach that is closely linked to product development.

Filtrona's top 10 customers represent 34% of Filtrona's sales, but the fifth
largest customer represents less than 2%. The principal area of customer
concentration is within the tobacco industry. Filtrona believes that
differentiated products and a low cost supply chain mitigate the concentration
risk.

The major element of supplier concentration again falls within the tobacco
industry and relates specifically to the suppliers of cellulose acetate tow for
cigarette filter production. This is a market served by five principal global
suppliers all of whom supply Filtrona. The top 10 suppliers to Filtrona account
for 53% of raw material purchases.

Filtrona considers that alternative sources of supply exist for all major raw
materials. These major materials include acetate tow, filter paper, polyester
yarns, polypropylene film and various readily available engineering and
commodity polymers.

8. Research and development

Filtrona's worldwide R&D centre for the cigarette filters business is based in
Jarrow in the UK and supports R&D activities on both proprietary and customer
developments. Filtrona expects that by the end of 2005 its dedicated filters R&D
team will comprise 40 personnel. R&D is undertaken to identify solutions for
producing new additives and product styles to assist customers in the selective
reduction of smoke constituents, to develop lower cost production techniques and
to develop new filter styles.

Fibertec's worldwide R&D is centred in Richmond, Virginia (US), with some
limited development work occurring in Reinbek (Germany). Fibertec's dedicated R&
D group focuses approximately 80% of its effort on customer driven projects and
20% on core technology projects. Principal research areas are in developing the
knowledge and processes in the production of non-woven bonded fibres to give
materials with different capillary transfer rates that support the identified
needs in the current and prospective customer base.

In coated and security products, the global R&D centre and print studio is
located at the Nottingham (UK) site where new print and security features are
developed. The FractureCode joint venture is responsible for its own software
and application development.

Within the other lines of business the focus is on development rather than
research. Development is driven by a combination of product marketing and
engineering, resulting in either in-house development or outsourcing of the
products concerned.

9. Further investment considerations

Filtrona's business, financial position, results of operation, growth,
strategies or dividend policy could be materially adversely affected by risks,
including any of those set out below. These risks could also have an adverse
effect on the trading price of the Filtrona Shares.

(i) Fluctuations in exchange rates

Filtrona may be adversely affected by fluctuations in exchange rates. The
consolidated results of Filtrona's operations are accounted for in pounds
sterling but the majority of Filtrona's sales are made and income earned in US
dollars and other foreign currencies. Movements in exchange rates used to
translate foreign currencies into sterling may have a significant impact on
Filtrona's reported results of operations from year to year. This has been most
noticeable recently in subsidiaries based in the US, due to the weakening of the
US dollar against sterling, and has adversely affected the consolidated results
in sterling in the 2002, 2003 and 2004 financial years.

(ii) Effective tax rate

The most recent effective tax rate for Filtrona is close to 31%. This rate is
not indicative of the future as the capital structure of Filtrona after the
Demerger will be different from the historic capital structure. The future
effective tax rate is likely to be higher and equate more closely to the
statutory tax rates of the countries in which Filtrona's principal operations
are located.

(iii) Ability to complete acquisitions and successfully integrate operations of
      acquired businesses

A portion of Filtrona's historic growth has been achieved through the
acquisition of businesses. The rate of any future growth that Filtrona may
achieve may in part be dependent on making additional acquisitions. Whilst
Filtrona has in the past made and successfully integrated a number of
acquisitions, there can be no assurance that Filtrona will be able to identify,
complete and integrate successfully suitable acquisitions in the future.

(iv) Relationship with the tobacco industry

A significant part of Filtrona's business relates to the supply of cigarette
filters and tear tape to manufacturers in the tobacco industry. Accordingly the
future performance of Filtrona's cigarette filters and tear tape businesses may
be affected by changes in conditions within those sections of the tobacco
industry which they supply, such as changes in consumption of cigarettes,
changes in demand for different types of cigarette and changes in regulations
affecting cigarettes. Whilst Filtrona has no history of involvement in tobacco
related litigation, it could be adversely affected by the incidence of such
litigation. Filtrona has no reason to believe that regulation specific to the
tobacco industry is likely to cause a material adverse change in demand for its
cigarette filters and tear tape.

(v) Product liability claims

Like any other manufacturer, Filtrona faces the inherent risk of exposure to
product liability claims if the products Filtrona supplies fail to meet
specification or the required standard. Filtrona has, and Filtrona believes that
the companies it has acquired have had, product liability
insurance at levels thought to be appropriate in relation to the products
manufactured or sold by Filtrona, with the exception of cigarette filters, for
which product liability insurance, as for other cigarette components, is not
available. However, there can be no guarantee that this insurance will continue
to be available at reasonable cost or at all, or will be adequate to cover
product liability claims against Filtrona. If Filtrona does not have adequate
insurance, product liability claims and costs associated with product recalls,
including loss of business, could have a material adverse effect on Filtrona's
business, operating results and financial position. Filtrona is not and has not
been a party to or otherwise involved in any litigation in relation to its
cigarette filters.

(vi) Unfavourable economic conditions or other developments and risks in the
     countries in which Filtrona operates

Filtrona's business strategy has involved and continues to involve manufacture
in low cost production locations. Filtrona may be adversely affected by
political and economic conditions in some of these production locations.
Transition towards these locations may also give rise to other execution risks
normally associated with such moves, including delays to the start of production
and the establishment of new distribution channels and other unforeseen factors.

(vii) Disruption to distribution or production facilities and information
      systems

Filtrona would be adversely affected if there was a significant failure of one
or more of its major distribution or production facilities or of a major part of 
its supply chain. Disruptions may be caused by industrial disputes, fire, information 
systems disruption or other material business disruption. Many of the manufacturing
processes of Filtrona are carried out in more than one location and hence
Filtrona has the ability to mitigate this risk in part by meeting production
requirements with the use of alternative manufacturing sites.

(viii) Customer base

In some of Filtrona's businesses the market, and hence the customer base, is
relatively concentrated. This is true primarily of Filtrona's cigarette filter
and tear tape businesses. Should the customers of Filtrona in those businesses
decide to satisfy their requirements internally or from other suppliers, and if
Filtrona were unable to win other customer orders, this could result in a
significant loss of business and a resulting adverse effect on Filtrona's
operating results. In the cigarette filter business, there does not appear to be
a clear trend among customers as both self-manufacture and outsourcing decisions
have occurred in recent years.







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