COMPANY MEETING

IMPERIAL CHEMICAL INDUSTRIES

LORD McGOWAN'S REVIEW THE eleventh annual general meeting of Imperial Chemical Industries, Limited, was held on April 2ISt at Queen's Hall, London, W.

The Right Hon. Lord McGowan, K.B.E., D.C.L., LL.D. the Chairman, presiding, said : For seven years now as managing director I have borne the main responsibility for the many decisions necessary in the administration of this great business. The time has come, in my mind is well as in that of my colleagues, for a step which will enable the immediate problems arising from the ever-increasing breadth of your company's business to be handled with the rapidity the future is sure to demand. The change centres round one key point. I have freed myself from the task of taking every-day decisions on current business. That responsibility has been handed to seven of our colleagues, the executive directors now entrusted with the several sections of administration namely, commercial, financial, overseas personnel, research, technical, and the groups central committee.

With the exception of the groups central committee each director has associated with him three of his colleagues. By ;his means we have formed links of responsibility and co-ordination on larger issues. This change is not so great as it may appear, for these gentlemen have now for a number of years shared in all important decisions through their co-operation with the president and myself in the general purposes committee, the functions of which I described in April, 1932. That committee has been reconstituted as a manage- ment board, over which I preside. On that board Lord Ashfield, Lord Weir, and Colonel Pollitt will serve. Standing apart from the day-to-day administration, they will help us on general policy more intimately than is possible at the full Board, while constituting a valuable link With the other non-executive directors.

The functions of the operating groups and the powers of the delegate boards which control their activities were also described in 1932 and remain unchanged. The board regard the new structure as a natural development of its policy of decentralisation.

Conditions in this country were good throughout the year' and the company with its interests„closely linked with the general level of trade activity, had an acellent year. Practically all plants were running at capacity and our only anxiety was whether peak demands would overstrain our ability to supply.

The Government's defence programme has naturally affected the demand for our Products, but we cannot define its measure. Most of it is indirect. The additional demand from this cause translates itself to us through general industrial activity. Supplies to the Service departments, apart from any question of rearmament, always reach substantial figures, but during 1937 the volume expanded considerably. Even at the higher level, however, it represented bin a small fraction of our total business.

We are being consulted on a number of defence schemes by reason of our unique technical knowledge and widespread activities, and certain contracts have been entered into, while others are still in the course of negotiation. I am, of course, unable to give you

any details of the but we are carrying out schemes of con- struction, acting- very -largely as agents for the Service departments and accordingly at their expense. We have also undertaken, on behalf of the Government, to supervise the actual running of certain plants when erected. The Service departments have expressed their appreciation of our work.

Despite the report of the Royal Commission on the private manu- facture of and trading in arms, much misapprehension still exists of the _dependence of the profits of your company upon armament orders at home and abroad. I therefore say again (as I did in April, .936) that only a very small percentage of our activities is concerned with such-business. At the present time it is our duty, in common with -other industrialists in 'this country, to assist our Government :n every way we can to execute and expedite the British rearmament programme.

But at the same time nothing would please us more than a world \ituation in which none of our products Would be required for war r defensive purpOses. (Cheers.) That, however,. is an idle dream; for we have to deal with world facts as they are. Nevertheless, :he maintenance of peace and the avoidance of war anywhere in the world is our greatest interest. At the close of my speech last year I informed you that your company had .6ffefe4 to acquire the preference and ordinary stock 01 the- Salt Union Limited, and this is today a wholly-owned sub- kidiary of your _company. We were led to make this acquisition by i he common interest between your company and the Salt Union In the ownership ind conversion of brine, coupled with the dose a!liance which' had exiSted between them for many years. Steps have been taken to organise the salt industry as a whole Pon more ordered lines. The Salt Union has shared-in the -general prosperity of 1937 and, NV" e are sure _that in due course this new

acquisition Will strengthen our prosperity. The Salt Union was the original founder and principal shareholder in the Mersey Power Company Limited. After a careful review of the prospects of that company as an electrical undertaking your board came to the con- clusion that it was not desirable, by retaining these shares, to become responsible for the supply or development of electric power. We therefore sold the total holding.

Every operating group continues to devote attention to research and development. The discovery of " Velan " by the Dyestuffs

Group was a remarkable chemical achievement. Velan ' forms a water-repellent compound with textile fibres and can be applied to silk, cotton, rayon, wool, and other materials without altering their appearance or character, except for the better. We shall be participat- ing in the Fmpire Exhibition at Glasgow and the company will have

its own pavilion. , .

International trade during 1937 has been largely under the influence of two opposing factors. During the first quarter commodity prices continued to rise confidence was growing, and industry was making plans entailing the increased consumption of raw materials. The Government's rearmament programme gave assurance of heavy and continuous demand for basic materials for some time to come. In America also conditions appeared to justify the expectation of a period of expanding business. In spite of the subsequent partial and, I hope,temporary, setback,. the overseas trade of your company has made progress in many directions. Development plans in China had to be postponed indefinitely.

Japan is facing a great emergency, with the result that ordinary commercial activities are more or less suspended. Comprehensive import restrictions have been imposed, and purchases from abroad are limited to bare necessities. The trade of your company in that market has inevitably suffered, but the diversion of Japanese factories from industrial to war purposes has diminished supplies available for export, so that Japanese competition throughout the world has in most of our products fallen to negligible proportions. In many important markets increased sales of our products have followed at better prices. In the Near East the industrialisation of Turkey has con- tinued, and has, on the whole, brought about a larger demand for our products.. Our Empire companies—Australia, Canada, and South Africa—all prospered in 1937.

ALLOCATION OF PROFITS

In considering this year's profits you will remember that the provision for the Central Obsolescence and Depreciation Fund has been raised from £1,000,000 to £r,500,000 ; that taxation liabilities have been increased, partly by the National Defence Contribution ; that provision has been made for war losses - and that we have not brought into the profit and loss account the stock dividend of Imperial Chemical Industries of Australia and New Zealand Ltd. Notwithstanding these provisions the company's net profit showed a further increase of £307,378, or 4 per cent. (Cheers.) The annual appropriation for obsolescence has stood at £1,000,000 for some time. During the last four years we have expended over

13,000,000 upon new physical assets, apart from those we have acquired through the absorption of other companies notably the

Salt Union last year. Both directly and indirectly, companies, the C,eotral Obsolescence Fund is now responsible for the obsolescence risk on a larger volume of fixed plant and machinery. It was there- fore essential to increase the annual provision.

The hoard have again appropriated kr,5oo,000 to the general reserve, while the appropriation for the Workers' Pension Fund, to cover the cost attributable to past service, was actuarially calculated at L172,000. After making these appropriations there is left £5,838,707, which With the 065,142 brought forward from last year, makes a total of £6,503,849 available for dividend and carry forward. A Preference dividend of £1,663,512 was paid on the due dates, leaving a balance of £4,8402337.

Out of the balance as stated above the board recommend a final dividend of '51 per, cent. ort the Ordinary stock, which with the 3 per cent. interim dividend already paid, makes a total dividend for the year of 81 Or cent, on that stock. The Ordinary dividend requires a sum of £4,284,158; which will leave £556,179 to be carried forward to 1938.

In considering the company's dividend policy, your directors have weighed carefully two opposing considerations. On the one hand, they desire to adhere to the ,conservative financial policy which they have so far followed and which, I think, has had the support of the stockholders. (Hear, hear.) Your directors regard themselves as trustees for your interest, not alone for a single year under review', but for' the' future. Their

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COMPANY MEETING

aim is to make your company so strong financially that, its stability shall remain unimpaired by even a major trade depression. They wish, if possible, to maintain a steady dividend policy, lying within narrow limits, through good and bad years alike.

On the other hand, your board realise that the mere hope of a higher dividend tomorrow is -somewhat unsatisfying ; they are certain that the basic foundations of the company have grown stronger in the past few years ; and they recognise that 1937 has been a year of exceptional activity and profit. For these reasons they recommend for your approval the final dividend proposed above, and do not doubt that the stockholders as a body will endorse their long term financial policy. (Cheers.) While the authorised capital of the company is unchanged, the issued capital has increased by £2,275,004, mainly because of the acquisition of the Salt Union. The market premium on the I.C.I. stock issued has been applied in reduction of the purchase price of the stock acquired, so that the purchase appears in our balance- sheet at the nominal value of the former stock.

The market value of all marketable and other investments held by the company and its home subsidiaries was £1,824,066 less than the book value at December 31st, 1936. With market values of securities falling drastically all over the world, we naturally could not escape. Of the total depreciation of £1,824,066 at the end of last year, the major part related to the difference between the realisable sterling price and the book value of the German invest- ments, all directly or indirectly in the great German chemical company, the I.G. Farbenindustrie.

We believe that the internal earning power, standing and efficiency of this great German enterprise have not changed for the worse. But, there is a practical embargo on the export of capital and dividends from Germany except on terms involving a heavy sterling loss. Though it is difficult to forecast any early change in German financial regulations, the board consider that these industrial investments should be retained, as the alternative policy of sale at any price is still less satisfactory. We have therefore written down the total book value of marketable investments by £1,500,000, and transferred £1,500,000 from the general reserve for this purpose. After doing so, the depreciation on the marketable investments was £324,066 at December 31st last, and £214,000 on yesterday's market values —a distinct improvement.

After these transfers to and from the general reserve, the total reserve at the end of the year remained unchanged at LI 1,160,000.

INVESTMENT POLICY

Some comments have been made on the company's policy of keeping its marketable investments in Ordinary stocks of industrial companies at home and abroad. When I.C.I. was formed it took over large blocks of such holdings from the merging companies. The past experience of those companies and the subsequent experi- ence of your company itself has, when regard is paid to the primary revenue test of annual yield and the secondary capital test of net profit on realisation, fully justified that policy. Nevertheless, we do not follow that course blindly, but continually keep under review the current state of the investment markets and their future prob- abilities. These marketable investments form a reserve source for conversion into liquid resources as may be required by our capital expenditure programmes. When the company was formed, such investments amounted to £16,500,000, against an issued capital of £58,000,000. At the end of last year these investments had fallen to £7,500,000, while the issued capital is £74,000,000. In the meantime, we hold them as permanent investments, not lightly subject to change, and, therefore, not as speculative counters. We know that their market values are subject to fluctuation, but, as we only draw on them from time to time, we have so far been able to do so when the sale has yielded us a net capital profit. The only exception concerns the German investments, and even of them we do not yet know the end.

CAPITAL PROFIT

The proof of the pudding is in the eating. Let me give you the facts. I shall speak in round figures and shall confine myself to the actual facts and exclude, for the sake of simplicity, all inter- company book-keeping transactions. When the company was formed it inherited from the merging companies marketable invest- ments of a value at that time of £16,5oo,000. During the eleven years ended last December, £13,000,000 of these investments, taken on the same basis of valuation, have been sold and a capital profit realised of £4,300,000. At December 31st last we still held of these original acquisitions £3,500,000, again taken on the same basis of valuation, of which the market values at that date showed a depreciation on that original value of £600,000. Taken together, therefore, the result on original merger values of investments both sold and still held is a capital profit of £3,7oo,000. During the eleven years of the company's existence we have, in addition, both bought and sold gilt-edged and marketable investments. The total purchases during this period amounted to £13,000,00o, and the total sales at cost value were Lio,o0o,000, the greater part of which related to gilt-edged, leaving iu our hands at December 31st last investments of a cost value of £3,000,000.

On these sales there was a capital profit of £60o,000, but on the investments still held at December 31st last there was a depreciation on the cost of £700,000, so leaving in respect of the post-merger investment transactions a net loss of £100,000. Summing up the whole of these investment transactions, we have therefore a net capital profit of £3,600,000. These capital profits have on no occasion been brought into the annual profit and loss account. but have all been used for capital purposes.

RETURN ON INVESTMENTS

Turning now to the rate of return on these investments, the average yield on those which were acquired from the founding companies on the inception of the merger is 7 per cent, on the original merger values. On the post-merger marketable invest- ments still held at December 31st last, the average yield on the cost value has been 4 per cent. This lower rate of return is largely attributable to the very low rate of return on the German investments by reason of the heavy sacrifice suffered on the conversion of dividends in marks into sterling.

On the whole, I am sure that these figures will convince stock- holders that the Board's investment policy has not been unjustified by its results, and that the suggestion that the stockholders have suffered in their dividends through losses on investments is entirely without foundation.

During recent months a new factor has been introduced by the fundamental economic changes which are taking place in the United States. The differences between labour and capital and those between business and the President seem so deep-seated as to throw some doubt upon the future trend of earning capacity of American industry. Possibly these changes are so fundamental that an invest- ment policy which was right in the past may now need revision. We have been strongly urged to hold all our investment reserves in cash and gilt-edged securities, on the assumption that no loss can arise from such holdings. But cash yields a negligible return and is subject to a fall in the purchasing power of money, such as was in evidence in 1937. Gilt-edged investments are not only subject to this latter influence, but also to movements in the rate of interest. Judgement of these and other factors is by no means easy, and at the present time your Board is giving anxious consider- ation to the whole position. The Board's duty, as they conceive it, is not to be influenced by day-to-day movements, but to follow the widest course over a period of years. That has been their endeavour in the past, not unsuccessfully, I hope you will agree, and it will continue to be their aim in the future.

CONSOLIDATED BALANCE-SHEET You have been handed a consolidated balance-sheet for Imperial Chemical Industries Limited and all its subsidiaries other than three small companies referred to in the notes thereon. The total assets and liabilities of 525 companies are included in that account. It was not possible this year to incorporate this statement in the Directors Annual Report but in future the meeting will be held in May in order that this can be done.

On the last page you will find an analysis on non-technical lines of the position disclosed.

The total assets aggregate LUC/ millions, including intangible assets of £151 millions. This latter item represents the book value of patents, processes, mineral rights, trade marks and goodwill, being the excess of the share purchase consideration over the value of net tangible assets of the various subsidiary companies less amount written off. This sum equals just over two years' purchase of the net profits of the Company for 1937. The liquid position is strong, for the current assets exceed the current liabilities by £191 millions.

The Obsolescence Reserves of £51 millions represent 12 per cent. of the book value of the freehold buildings, plant and machinery. The total amount provided last year by way of appropriation to the Central Obsolescence Fund and sums charged in the trading accounts of the subsidiary companies which are not wholly owned is £1,643,000, or 3.5 per cent. of the aggregate book value of freehold buildings, plant and machinery. Investments in associated companies in Africa, Canada and elsewhere stand at L7i millions. In the opinion of your Board both these investments and the fixed assets generally are valued on a very conservative basis.

Much of the future must depend on the United States. Despite its policy of political isolation, that country is still so important, both as an exporter of agricultural and industrial goods and as an importer of raw materials, that sound or unsound business conditions there are of major significance to the world as a whole. You will be aware of the precipitate decline of business there last autumn. It was quicker and steeper than on almost any previous occasion. Yet we remain firm believers in the resilience of the American economy and its latent power of recovery. When an upward movement does occur, it will no doubt be reflected in world and therefore British trade.

Even if British industrial activity in 1938 shows some decline, it does not follow that your Company will be affected in the same measure as general business. Our interests are widespread, not only by products, but also by markets. Your company was never in a sounder position. As trade currents have changed, as one source of demand has shrunk and another expanded, we have adjuqtzd our manufacturing resources and values accordingly.

We have replaced efficient by more efficient plant, we have ut out dead wood and substituted new capacities in products and markets of promise for those of less earning power. We therelore hope to maintain our general position even if trade continue to show some decline. So far this year we have reason to be satin,N1 With the results of our business, and I shall therefore hope to reet you again next year with a report and balance-sheet with Which you will not be dissatisfied.

The report and accounts were unanimously adopted: