In a trading update issued ahead of its interim results for the 1H 2005 to 30 September, Pilkington plc said pretax profit is expected to be up 20% on the 1H 2004, taking into account the timing of st…
In a trading update issued ahead of its interim results for the 1H 2005 to 30 September, Pilkington plc said pretax profit is expected to be up 20% on the 1H 2004, taking into account the timing of strong 1H licensing and engineering receipts. The market background remains challenging, the group said, made more so with rising energy costs. However the group said solid progress is being made in Automotive and it expects to meet market expectations for the full year. Stuart Chambers, Group Chief Executive commented: “Pilkington continues to deliver ongoing improvements in manufacturing efficiency and cost reduction. Results for the underlying core businesses in the 1H-year are in line with our expectations. Emphasis on generating free cash flow will enable us to report another strong cash performance. The Group remains on track to begin its transition to the third phase of its strategy over the course of this financial year and has begun to target investments into profitable growth opportunities.” Pilkington, along with all EU listed companies, is now required to produce its financial results under IFRS. In anticipation of this change, earlier in 2005 Pilkington published IFRS information relating to its balance sheet at 1 April 2004 and its results for the 1H year and for the full year to 31 March 2005. BUILDING PRODUCTS Building Product markets in general remain competitive, Pilkington said, despite which revenues are up by approximately 5%. Rising energy and raw material prices continue to put pressure on input costs. However, renewed cost reduction efforts, efficiency improvements, and the surcharge mechanisms which pass on part of the impact of energy cost increases have mitigated the effects. Overall, profits in Building Products should improve over the 1H 2004 by up to 10%, the group said. The European Building Products business represents two thirds of the group“s total Building Products sales. The energy surcharge introduced in 2004 has offset some of the cost push from higher gas and oil costs, though underlying float prices continue to be under pressure. The UK market is soft and utilisation levels are low, which has affected sales volumes and profitability. In continental Europe, market volumes have improved slightly, but prices have weakened. Nevertheless, due to improved operating efficiencies and a revamped management and administration structure, operating profits will be above the 1H 2004. Previously the group reported that Building Products North America, representing 12% of Building Products sales, was expecting the weak commercial construction sector to recover. The market has, as yet, failed to improve although expectations are that recovery will come. As a result, revenues are unchanged and profits are slightly down on 2004. In South America, the group says its Building Products business continues to perform well. Economic conditions in the major markets are strong and revenues from the operating businesses are expected to be higher than for 2004. However, higher input costs and exchange rate fluctuations have impacted profitability, keeping returns at levels similar to 2004. In Australasia and Asia revenues and profits are expected to improve on 2004. AUTOMOTIVE Pilkington Original Equipment (OE) volumes were robust, the group said, partly due to several successful new product launches from vehicle manufacturers. The North American Automotive Glass Replacement (AGR) market has stabilised and AGR sales in Europe have improved. As a result, Pilkington Automotive operating profits will be up by around 25% on the 1H of 2004. More than 55% of Pilkington Automotive“s sales are in Europe. The market for light vehicles has been flat, but once again, due to success with new models, Pilkington said sales volumes continue to move ahead. The European AGR market has been stable, though the group“s AGR sales increased. Pilkington said its ongoing emphasis on efficiency improvements and cost reductions means that despite continuing price pressure and rising energy-related costs, profits in Automotive Europe will exceed the same period of 2004. Over 30% of its Automotive business is in North America, where light vehicle build is expected to be around 1% up on 2004. Sales to OE manufacturers are higher than 2004 and the acquisition of AGR branches from Autostock has started to flow through into higher sales in the AGR market. There is still significant pressure on prices and higher energy costs, though the benefits of increased volumes, operational efficiency improvements and cost reductions will lift profits above the 1H of 2004. In South America, light vehicle demand has risen 10%. Strong sales volumes and ongoing manufacturing efficiencies will lead to higher operating profits than the same period 2004. Results in Australasia have improved, partly as a result of stronger market volumes. In China, the market continues to expand rapidly and increased emphasis has been put on developing the cost and operational efficiency of the businesses. ASSOCIATES AND JOINT VENTURES Under IFRS, the results of joint ventures and associates are disclosed differently from UK GAAP. In the future, Pilkington will report the group“s share of post tax profits of joint ventures and associates as a one line item, prior to disclosing the group“s profit before tax. In the 1H 2005, the results from Vitro Plan SA de CV and subsidiaries (VVP) (in which Pilkington has a 35% stake) are well down on 2004, as VVP continues to suffer margin erosion in its main markets. Operating profits in the Cebrace joint venture in Brazil are at similar levels to 2004, though borrowing costs have risen following the investment 2004 in a fourth float line. In China, the group“s main investment, SYP, has seen both sales and operating profit broadly in line with the 1H of 2005, as China experiences steady demand for more high performance glass products in construction projects. The Russian joint venture float with Emerging Markets Partnerships is due to be commissioned in the next few months. Overall, largely as a result of the difficulties at VVP, Pilkington says it anticipates that the profit after tax contribution from associates and joint ventures will be down by more than 50%. FINANCE Pilkington says it remains committed to the generation of free cash flow, though cash flow generation in the half-year is likely to be lower than in the same period 2004. The beginnings of investment for growth (the Autostock acquisition in North America and further investments in China) have been accomplished within self-generated cash flow, while still enabling borrowings at the end of September to be reduced further since March 2005. Interest costs in the 1H-year are running at similar levels to the 1H of 2004. Due to the volatility of some of the items now included within overall finance costs the group says it is not possible to predict the final outcome for the half year at this stage. While the group“s borrowings are down, interest rates are generally higher. Both Standard and Poors and Moodys have reconfirmed the group“s ratings at BBB and Baa2 respectively. In the 1H of 2005, Pilkington refinanced GBP 430 million of 5 year term facilities through a syndicated loan arranged through its core bankers, at substantially lower rates.