AG Industries: Glass firm cuts profit outlook

Glass manufacturer AG Industries has warned it is looking at lower interim headline earnings because of the stronger rand and an increase in gearing and finance costs.

But it said improved working capital management and strong operating cashflows were expected to result in a reasonable return on equity for the first half of the 2003 year.

The group, formerly known as Africa Glass Industries, is due to release its results for the six months to the end of December on about March 25.

In a trading update AG Industries said strong organic growth had continued for the first half of the 2003 financial year.

However, the restructure of the company's international operations during the first half of the 2003 financial year, in preparation for the full scale introduction of export campaign finished products, had resulted in a significant reduction in the operating margin in international operations.

"This notwithstanding, headline operating profit before foreign exchange and finance costs continues to grow in line with the Company's long range performance targets. Operating cash flow, likewise, is strong," it stated.

The substantial Rand strength encountered during the period, however, had led to a foreign exchange loss in contrast with significant foreign exchange earnings in the comparative period.

"In addition, as projected at the close of the 2002 financial year, an increase in gearing and finance costs arose from infrastructural developments in prior periods.

"The combined effect of the change in foreign exchange earnings and finance costs has been to reduce headline earnings. However, improved working capital management and strong operating cashflows, are expected to result in a reasonable return on equity for the first half of the 2003 financial year," the group stated.

Although operations had grown satisfactorily, no significant benefit had been enjoyed from the company's export campaign, it said. But it said a wide range of first phase export campaign finished product was now on sale in international markets with second and third phase products to follow imminently.

"Still stronger growth in operations is, therefore, expected commencing in the second half of the 2003 financial year," it added.

In the absence of the cost of the restructure of international operations, which had already been borne, operating margins can also be expected to improve.

"Furthermore, as the benefits of the export campaign escalate, a return will be earned on the infrastructure developed for the campaign. This return will counter the effect of the additional finance costs borne in respect of that development.

"Finally, the Rand is not expected to appreciate further at the rate it has over the past nine months," AG Industries said.

"In conclusion, a still stronger operating performance can be expected in the absence of restructuring costs and as the export campaign escalates. Furthermore, in the absence of the variances experienced during the interim period in foreign exchange and finance costs, headline earnings growth should more closely mirror the growth in operating profit."

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