RECTiCEL Business Report FY2006

Business Highlights

Financial overview  
(in millions of euro) FY2006 FY2005 R.C. Factors
Sales 1,474.4 1,391.6 5.9% (See factor 1 below)
EBITDA 106.0 82.1 29.1%
Operating Income 16.0 11.1 44.1%
Net Income -19.1 -25.4 -
Sales 426.9 461.9 (7.6%) (See factor 2 below)
EBITDA 26.0 21.0 23.8%

The result of the Interiors Solutions division in the U.S.A. left aside, the key issue was the strong recovery in structural profitability during the past year. Without the impairment
on the American assets of the Interiors Solutions division, 2006 would have been a good year.
Sales rose by 6.0%, of which 5.4% is the result of pure internal growth. Nearly all activities contributed to this. Not only the passing on of the higher raw materials prices in its own selling prices, but also structurally higher volumes were the success factors here.
In the Flexible foams sector, sales were again favorably influenced by better market prices for trim foam.
The improved profitability, which was already perceptible in the second half of 2005, continued in the course of the year 2006 for nearly all activities progressed. The Company recorded an EBITDA of EUR 106.0 million (+29.0% compared to 2005), which corresponds to an EBITDA margin on operating income of 7.2% (5.9% in 2005). As a result of the impairments (EUR 31.1 million) on the American assets of the Interiors Solutions business, the EBIT came to only EUR 16.0 million (+ 85.3% compared to 2005) or an EBIT margin on operating income of 1.1% (0.6% in 2005).
The net result ended up at EUR -21.2 million, compared to a loss of EUR 28.0 million the year 2005. Without these one-off impairments, the Company would have made a structural net profit in 2006 of EUR 9.9 million.

Automotive Division

The lower operating income mainly results from the partial disinvestment from the window encapsulation business (EUR -4.9 million) in the first half of 2005 and the lower sales of moulds in the Interiors Solutions subsector (EUR 31.5 million). On the other hand, sales in the seating subsector (Proseat) rose.
The overall profitability of the Automotive sector progressed.
Predominantly thanks to the good performance in the European plants, the Interiors Solutions division as a whole managed to generate slightly positive EBITDA.
In the Czech factory, the Volvo S80 was started up successfully, in four European plants the interior for the Mercedes C-class was launched smoothly and in China, a start was made in Ningbo for the Skoda Octavia.
During 2006, a new generation of interior skins (Colosense R) was introduced, which met with a positive reception on the market.
Although the Seating division (Proseat) managed to increase its operating income in 2006, profitability was under pressure as a result of delays in passing on higher raw materials prices and the start-up of a new plant in the Czech Republic.
The turnover of the Exteriors division fell as a result of the partial disinvestment from window encapsulation. Despite this fall in sales, this subsector managed to maintain its profit level.

Joint Venture
In September 2006, the Company and the Canadian group Woodbridge decided to extend their cooperation further by integrating Woodbridge's moulded foam activities (seat cushions for the automotive industry) in the United Kingdom in the existing joint venture Proseat.

Divestiture but in fail

The negotiations with the German private equity group Nordwind Capital on the partial sale of the Interiors Solutions division (interior trim for the automotive sector), announced in September 2006, were broken off at the end of February 2007.

Proseat seat cushions
In recent years, the Company has expanded its activities considerably in this business sector. To consolidate and further build on this successful position, cooperation was launched with Woodbridge of Canada in 2000. This cooperation has gradually strengthened and now the European seat cushion activities of both partners are undertaken integrally in the joint venture Proseat. From 2007, this joint venture, following the contribution of Woodbridge's seat cushion activities in the United Kingdom, will be 51% controlled by the Company.
It has been forecasted that the production of the European motor industry will rise within the next five years from 17.1 million to 19 million cars per year, of which a large
proportion will be manufactured in Central and Eastern Europe.
Proseat is aiming firstly for a recovery in profitability and prudent annual growth in turnover.
Interiors Solutions
Despite the non-occurrence of the disinvestment from Interiors Solutions, the Company is convinced that this activity will expand further in the coming years. The patented Colofast Spray technology continues to receive constantly growing attention from a large number of car manufacturers.
To maximize the opportunities for growth in this activity and to meet the considerable investment requirements, the Company deemed the best solution to be to expand this division further in the future with the German private equity group Nordwind Capital. Although this course has now been abandoned, the Company is still confident in the division's chances of success. The European activities are still doing well and there is no reason to assume that
this will not carry on in the future. The American activities, on the other hand, will be monitored attentively.
With the development of the light-stable/colour-fast Colofast, the Company has been able to offer new impetus to polyurethane as an alternative to other traditional materials. Applications have met with great interest, especially in the automotive industry. The patented light-stable Colofast material was first used as a raw material in car window encapsulation. At a later stage, this aliphatic material was used in the unique Colofast Spray process for the production of interior trim for cars (Interiors Solutions). After the sale of the
window encapsulation business in 2005, the Company continues to produce PU-RIM ready-to-use compounds (in Belgium and the USA) and to market them worldwide.


R&D Expenditure (in millions of euro)
- FY2006 FY2005 FY2004 FY2003 FY2002

R&D Expenditure

18.2 16.4 15.7 17.2 14.9
% of Sales 1.4% 1.1% 1.2% 1.4% 1.3%

R&D Structure
-The Company has an International Development Center (IDC) in Watteren, Belgium.
-EURO 18.2 million was invested in R&D in 2006
-71.7% was allocated to research in the automotive sector.

New Product Developments

Colofast Spray technology
- The Company's Colofast Spray technology is protected under 16 patents in terms of both chemical properties and the basic technology itself.
-By using the ‘Colofast Spray’ technology, the Company was the first to be able to supply colourfast components in polyurethane, which has permitted a revolutionary modernization in interior finishes for cars.

Tau foam
Tau foam gave new impetus to the application of PU as an insulation material in the construction industry because of its light weight, incredible strength, and improved fire-resistance.