Chairman & Managing Director’s Report

In the period since the Annual General Meeting, the global economic environment has continued to deteriorate with a virtual collapse of the world banking system and a significant decline in consumer sentiment across all major economies. Despite this very challenging environment the Directors of Nuplex Industries Limited have advised that for the six months to 31 December 2008 the Company remained profitable and generated a strong cash flow.

Monthly profits and cash flow at the time of writing are both positive and in line with the Company’s expectations and guidance.

After-tax profit for the period under review was $6.0 million (pcp: $24.6 million). This result was after significant one-off costs totalling $5.6 million of which $2.9 million related to acquisition due diligence and $2.7 million to site remediation at Seven Hills. Before these one-off costs, operating profit after tax was down 53% from last year at $11.6 million ($24.6 million).

EBITDA was $43.4 million ($60.6 million) while operating cashflow of $44.3 million was comparable with the prior year.

The strong positive operating cash flow of $44.3 million ($44.1 million), despite the downturn in earnings, was due to a reduction in working capital of $27.7 million (increase $4.3 million) and tight control of discretionary spending.

Capital expenditure at $12.5 million was well below last year ($21.4 million), due to completion of expansion projects in Europe and a pause in expanding capacities as existing capacity is satisfying current demand.

Given the current economic environment, the 2009 interim dividend has been suspended in order to strengthen the Company’s balance sheet and repay debt. The Board considered the impact of the decision on shareholders and, on balance, believed this decision to be in the best long term interests of the Company.

This has been the most difficult period in the Company’s history, with a drop in global demand at a rate and to an extent never seen before. Against this backdrop, the result, although disappointing, demonstrates that Nuplex remains a sound and profitable Company, even in such adverse times.

Operations have been restructured in line with current trading however the benefits of this will not be fully realised until future periods. As global confidence returns, as it will inevitably do, a leaner and focused Nuplex as a consequence of this restructuring will be well positioned to profit from increased demand.

The Company operates in two business segments, Resins and Specialties, and both traded profitably. The Specialties segment grew their share of total EBITDA to 25% demonstrating the value of holding diverse, but strategically linked business operations.

The Resins business provides key raw material inputs for the coating, composites, construction, adhesive, textile, printing ink and paper industries from manufacturing units in 10 countries around the world. Sales revenue increased as a consequence of higher pricing and currency movements in spite of reduced demand in most regions however EBITDA reduced by 34% as volume sales fell, particularly in higher margin business.

The Specialties business supplies the chemical, plastic, construction, coatings and life sciences markets in Australasia with a range of functional products, the majority of which are provided by major international producers. Sales revenue grew by 7% while EBITDA dropped 4% as demand fell in traditional markets and sales were largely replaced in new market sectors.

Raw materials continued their upwards movement before responding to lower crude oil prices and dropping demand towards the end of the period. Slower consumption of inventories and the need to work through some longer term fixed price contracts will delay the benefit of this into the second half of the financial year. In general, all businesses achieved pass through of the effect of higher raw material costs.

Markets

While all regional markets suffered some degree of contraction over the period, the speed of market reversal from growth to significant decline was particularly evident in Europe and South East Asia. The drop in demand in both markets was further exaggerated by the need to reduce inventory built up through the entire supply chain based on recent growth history. In contrast, demand softened across other regions but was relatively less material.

Year-on-year performance in Asia was steady with domestic demand holding up well but products destined for goods to be sold ultimately to the European and US markets showed slippage. China continued to exhibit resilience.

The Americas improved substantially, benefiting from the earlier closure of the Brazil operation as well as reduced operational costs as products manufactured externally were brought in-house.

The loss of critical mass in New Zealand manufacturing became very evident with a major reduction in contribution, with reduced demand across all segments and some pressure on margins. Australian results were soft on the back of some poor performing sectors being those markets predominantly exposed to discretionary spending, such as marine and swimming pools. Demand held up well in the majority of other target markets.

European performance was particularly poor with reduced volumes from higher margin products. The automotive business, a significant segment, was particularly hard hit.

Markets are now showing greater stability each month giving comfort that the bottom of the trough has been reached or is in sight.

Businesses

The greatest impact on sales to date has been from products that are used in the production of consumer goods. While these are not the major applications for Nuplex products, many specialty coating resins find application in automotive OEM, consumer electronics and similar markets which have proven, at least in the short term, to be more fickle than the historical market segments of the Company in this business climate.

In certain regions, Nuplex manufactures coating resins on behalf of a number of customers. In some instances this is as a substitute for that company not having invested in resin manufacturing capability. In others, it is due to a lack of capacity on their part. In the latter case, the downturn in demand has had the effect of freeing capacity resulting in a tendency to draw manufacture back in-house with a consequential loss of sales for Nuplex.

New powder coating resin manufacturing facilities in the UK operated well during the period with high production rates and a 100% quality record from commissioning. In addition, the sophisticated water based resin production unit in The Netherlands performed to expectations enabling increased production of these more environmentally acceptable products.

As Europe moves into a more rigorous era of environmental regulation for paints and coatings from 2010, newly developed and now market proven products continue to give confidence that the Company is well placed to meet future demands from this sector

Completion of capital works in the US enabled production of G-Cure resins to be brought in-house with subsequent cost savings. Demand in specialty segments was encouraging and the business was successful in managing its cost base to a lower level.

VAT changes in China removed the advantage that South East Asia had enjoyed short term as an export base for Europe and the US and may well have underpinned continued good demand from the China market which continues to value high quality, reliable manufacture. The substantial reduction in manufacture of furniture and consumer electronics in the Asian region has particularly impacted the coatings market.

In Australasia the market retreated as the economy slowed and imported paint, in particular, took share in the Australian decorative paint segment. New Zealand shows the impact of long term recessionary conditions and the lack of protection of its industry base with a continuing gradual decline in sales while in Australia, demand was steady relative to the prior year.

The Composites business, already in decline at the start of the period showed further softening before finally settling at a substantially reduced demand level across Australia and New Zealand. In spite of the impact on demand from falling sales of products related especially to the leisure sector, demand for capital goods is strong and set to grow as the focus on increased infrastructure spending generates opportunities for the Company.

Capacity for composite resins in South East Asia has been increased by investment in the Indonesian operation, providing the means to service this fast growing regional market. Much of the work at Wacol (Australia) has been completed as the plant there is expanded in capacity to absorb volumes of product previously manufactured externally under contract. Unit operational costs will fall as a consequence.

Demand for functional and process aids for the paper making sector remain steady.

Specialty Products continued to make progress, penetrating new market segments and servicing new agencies. In general, these offset reduced demand from some historically strong segments and this business continues to grow in importance within Nuplex’s portfolio.

Masterbatch operations followed the fortunes of the general packaging industry which is generally weaker. The effect of slightly lower demand was diluted somewhat by tight cost management.

Construction Products enjoyed good demand for functional and resilient flooring. Sales into the lightweight plaster cladding sector showed no recovery while this business unit in Australia was exited late in the period.

Capital Management

Gearing (debt to debt + equity) fell slightly to 52.3% from 53.2% in the prior corresponding period. In spite of this the Company found itself at period end not in full compliance with its banking requirements.

The rapid downturn in European performance and reversal of the NZD against major trading currencies post the date of the Annual General Meeting is the primary cause of this failure to comply. Under Nuplex’s multi-currency cash advance facility agreements with banks, the Company is required to comply at all times with a senior debt to EBITDA cover ratio (SDCR) of no more than 3.00 times. At 31 December 2008, the Group was not in compliance with this covenant while being in compliance with other covenants.

Nuplex is required under accounting standards to report its EBITDA based on average exchange rates for the prior calendar year, while senior debt is measured at the rate at period end. At that point in time, the NZD was lower than the average during the year, increasing the ratio, while over the period, the Company actually paid down debt in local currencies. However, due to the weak NZD at period end, senior debt measured in NZD increased.

Nuplex commenced discussions with its banks as soon as this situation became obvious, seeking an amendment to the covenant ratio to enable the Company to comply. As you will have seen from recent announcements, the Company has secured a waiver from compliance with the SDCR ratio until 30 April 2009 and has renegotiated higher covenants to 29 September 2009.

On 20 March 2009, Nuplex announced it is considering raising $132.8 million of new capital by undertaking a pro-rata renounceable rights issue of new shares to existing Nuplex shareholders. The rights issue will be fully underwritten by First NZ Capital Securities Limited. Details of the rights offer have been announced and are being sent to you under separate cover.

In the meantime, the Company is preserving cash by eliminating discretionary spending, limiting capital expenditure to meet essential stay-in-business costs and complete current projects. It has also been reviewing the potential for disposal of unutilised and underperforming assets. The properties at Avondale (Auckland) and Seven Hills (Sydney) which had previously been advised as unutilised assets remain subject to remediation and buyer demand.

The Company expects to release further working capital as a natural consequence of falling sales volumes and prices as well as success in inventory reduction programmes.

Outlook

There are signs that markets are steadying – albeit at demand levels significantly lower than in the prior year. This more stable business environment allows proper resource planning, enabling the organisation to match its size to future needs.

Nuplex like other manufacturing businesses will take time to fully adjust its cost structure and resource requirements to future demand. Short term changes have been made that have provided an immediate impact. However, before more permanent changes are made it is necessary to have visibility on demand to avoid costly mistakes and create a poor culture and attitude in the Company’s workplaces. Retention of key company and industry specific skills is paramount to underpin an ability to take advantage of future business opportunities.

Through the second half of the current financial year, overall sales volume is anticipated to be slightly lower as markets bottom out and complete the destocking process. However, there will be some benefit from a lower cost base following the restructuring of regional operations in line with current demand. In addition, benefits will come from:

• Elimination of one-off costs in the first half which impacted earnings at both EBITDA and net profit level.
• Market share gains and new agencies.
• Lower raw material costs.
• Reduced operational costs in Australia as outsourced manufacturing has been brought in-house, with new capacity commissioned at Wacol, Queensland.

Taking all of this into account, current guidance is for the second half result to be much in line with the first half. Cash generation remains management’s principal focus, with ongoing programmes to drive operational costs lower, release working capital, improve debt collection, and maintain capital expenditure at minimum levels consistent with proper maintenance of operating plant.

The Company enjoys strong relationships with the leading global and regional companies in target market segments and continues to invest in technology and innovation as the drivers for a successful future. The market is expected to continue its solid support for the Company’s existing product range as well as new technologies that reduce environmental impact and create lower cost solutions.

Nuplex has proven its ability to remain profitable through a time that is unlikely to be repeated. As its cost base adjusts to current demand, and markets stabilise and then recover, Directors believe that the Group is well placed to improve performance in the years ahead.

Rob Aitken, Chairman and John Hirst, Managing Director