Pilkington positive in trading statement ahead of interims

In a trading up-date issued ahead of its interim results, British flat glass conglomerate Pilkington plc said that trading conditions remained difficult but the company was on track to meeting its ove…

In a trading up-date issued ahead of its interim results, British flat glass conglomerate Pilkington plc said that trading conditions remained difficult but the company was on track to meeting its overall objectives. Stuart Chambers, Group Chief Executive commented “Pilkington continues to make good progress with cost reduction and further improvement in our manufacturing performance. Overall, trading is in line with our expectations and in the first half year pre tax profits will be ahead by approximately 10 per cent, partly because results in the first half of last year were adversely affected by extended cold repairs in our float operations. Continued emphasis on free cash flow generation will enable us to report another strong cash performance, in line with our overall objectives.” Reporting on the operations of the firm“s major divisions, Building Products was still suffering from weakness in major markets although there was better news from the Chinese and Russian operations; in Automotive, improved demand and profits came against a background of “sluggish” vehicle sales. The statement was issued ahead of the company“s interim results announcement for the period to 30 September 2003, which will be made on Wednesday, 5 November 2003. Building Products According to the Pilkington statement, Building Products markets except UK and Australia have continued to be weak. Efficiency improvements and cost savings have continued and the operating profit for Building Products in total is running at approximately the same level as the 1H last year. In Europe, the firm“s Building Products business, representing two thirds of total Building Products sales, continues to be hit by the economic situation on the continent, particularly in Germany. By contrast, trading performance in the UK has held up well, thanks to good sales of Pilkington “K glass“. Float prices across Europe are now slightly down on average since the beginning of the financial year. Building Products North America, representing 15% of Pilkington“s Building Products sales, has been adversely affected by the weakness in commercial construction, where the firm says it is the leading North American glass supplier. Office vacancy rates are still high, Pilkington says, making near-term market improvement unlikely. However operational improvements continue to come through from the North American “Step Change“ programme, lifting operating profits. Sales of Pilkington“s 35% associate, Vitro Plan SA de CV (VVP), declined by approximately 10% due to competitive pressure in the domestic market. Export sales, on the other hand, benefited from the weaker Mexican peso. Operating profits were affected by the one off closure costs of a patterned glass line, and in total are down by around one third on last year. In South America the firm“s Building Products businesses continue to perform well. Market conditions in Brazil are difficult, but Pilkington says it is benefiting from the improved economic environment in Argentina. Overall operating profits from South America are ahead of the first half of last year. The Australian business continues to perform well and profits will be at a similar level to this time last year. In China, the Group“s main investment, SYP, has seen both sales and profit increase over the comparable period, growth coming from improved sales of processed architectural glass products, as China experiences increased demand for more high performance glass products in construction projects. In September 2003 the company announced the formation, with Emerging Markets Partnership (EMP), of a 50:50 joint venture to construct and operate a float glass plant in the Moscow region of Russia. The investment will be financed by GBP 21 million of equity each from Pilkington and EMP, and from project loans. Pilkington“s equity investment will be made over the next two years. The plant, to be built and operated by Pilkington, will have a sales capacity of approximately 240,000 tonnes per annum and is planned to start production in 2005. The plant represents a first step in establishing a growth opportunity for Pilkington in Russia, an important expanding market for glass. Automotive Despite what Pilkington describe as “sluggish” automotive markets, a combination of good progress on new models featuring Pilkington glass and continued success in cost reduction and manufacturing improvement has improved operating profits by around 20% at the half year stage. Just over half of Pilkington Automotive sales take place in Europe. The firm says light vehicle production in the western European market has slowed, though demand for Pilkington OE products has increased, with good gains on new model introductions and higher shipments of specialised OE applications (bus, coach and truck). The European Automotive Glass Replacement (AGR) business has held up well. In total for Europe profits have improved, due to sustained improvement in manufacturing efficiencies and a relentless focus on cost reduction. Just under 40% of Pilkington Automotive business is in North America, where overall light vehicle build is running around 5% lower than 2002. However the company“s OE business continues to benefit from operational improvements. Sales from Pilkington“s North American AGR business have reduced, due to a 5% fall in the overall market and to competitive pressures. Overall profits in North America are at similar levels to last year. In South America, representing approximately 6% of total Automotive sales, vehicle production was slightly ahead of last year, as were Pilkington sales. The combination of higher sales, increased productivity and improved plant efficiencies have resulted in an increase in the firms operating profits in the region. Results in Australia show improvement over last year, reflecting efficiency improvements and a more favourable trading environment. The automotive glass joint ventures in China all continued to experience strong sales and profit growth. The Chinese vehicle market is growing rapidly, and it is expected that two million passenger cars will be built in China in 2003, double the level of 2002. Exceptional items Exceptional items in the period will consist of the cost of exiting the Automotive Glass Replacement business in New Zealand, which is anticipated to be in the region of GBP 7 million. In July 2003 Pilkington announced an agreement to sell its Aerospace business to GKN for GBP 42 million, payable in cash, contingent upon obtaining the necessary regulatory approvals. It is anticipated that final approval will be obtained in the next few weeks. After accounting for purchased goodwill the transaction is expected to generate neither significant profit nor loss. Finance Pilkington says it remains committed to the generation of free cash flow through tight control of working capital and capital expenditures, together with a continued drive to reduce costs in all areas of the business. Free cash flow will exceed the level of the first half of last year, leading to a further reduction in borrowings. In the first half of last year the interest charge was negatively impacted by the firm“s share of exchange losses incurred by its associate, VVP, on their US dollar denominated loans. This has not recurred this year. Interest costs in total, which have further benefited from the impact of good cash flow and lower interest rates, will therefore be down on the first half of last year.

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