Overall, results for the first half year are in line with expectations, with robust profits achieved despite rising costs and a strong pound. Profit before amortisation of goodwill, exceptional items and taxation was £87 million in the half year, up 14 per cent at constant exchange rates.
Pilkington continues to deliver on its strategic priority of cash generation, with free cash flow of £97 million in the first half. Group debt of £621 million has been reduced by 20 per cent since September 2003.
Turnover in the first half year including joint ventures and associates was £1.3 billion, one per cent up on the first half of last year, when exchange rate movements are taken into account. Operating profits for Group businesses of £94 million represent a decline of £4 million over the first half of last year, although using constant exchange rates profits would have increased by £3 million. Operating profits of joint ventures and associates increased by £3 million to £19 million (an increase of £6 million at constant exchange rates), principally as a result of improved results from Cebrace, the Brazilian joint venture.
Exceptional items in the first half year amounted to a net charge of £1 million, arising from the closure of the Building Products decorated glass operations in Australia and some Building Products processing and merchanting operations in Austria. These losses were largely offset by the profit on disposal of a small joint venture business, SDC Technologies Inc., in the USA.
Earnings and Dividend
Earnings per share before exceptional items and amortisation of goodwill increased from 4.1 pence to 4.3 pence, while basic earnings per share increased from 3.1 pence to 4.0 pence. The interim dividend has been maintained at 1.75 pence per share, to be paid on 17 December 2004 to shareholders on the register at 3 December 2004.
The Group has adopted UITF 38 "Accounting for ESOP trusts" and UITF 17(Revised) "Employee Share Schemes. As a result the Group has reclassified the company's own shares (previously carried as an investment asset in the balance sheet) as a deduction from shareholders' funds. This has resulted in restatements of the accounts for both the half year to 30 September 2003 and the year to 31 March 2004, as set out in note 13 to the financial statements.
International Financial Reporting Standards
Pilkington is well advanced with its preparations for the introduction of International Financial Reporting Standards (IFRS) and will set out, early in 2005, details of the policies to be adopted and changes to the restated opening IFRS balance sheet at
1 April 2004. At the same time the Group will identify the key IFRS changes to the half year results to 30 September 2004.
Cash Flow and Borrowings
Free cash flow of £97 million was £8 million better than the record level achieved in the first half of last year, demonstrating that Pilkington is continuing to deliver on the cash generation part of its strategy. As a result Group debt has fallen by £43 million in the first half year and by £154 million in the last 12 months.
The strong pound pushed Building Products sales down slightly during the first six months of 2004. Excluding our share of joint ventures and associates, sales fell five per cent to £599 million. Despite lower sales, the ongoing focus on cost reductions and efficiency improvements produced operating profits before amortisation of goodwill of £65 million, not far short of the £67 million reported in 2003.
In Europe, our Building Products business, which represents around two thirds of Building Products in total, continues to be affected by the generally sluggish European economy, though there are signs that markets are beginning to recover. After a strong trading performance last year, competitive pressures have reduced profits in the UK market. Float prices across Europe appear to have stabilised.
Building Products North America, representing 13 per cent of total Building Products sales, is concentrated on commercial construction, where Pilkington is the leading North American glass supplier. Office vacancy rates have been high but are now falling and orders for glass have begun to pick up. Cost reductions have underpinned profits, which were ahead of last year in dollar terms.
In South America, our Building Products business continues to perform well. Demand for float glass continues to grow strongly in Argentina, Brazil and Chile. Overall, operating profits from South America were up on the first half of last year.
Operating profits in our Australian business are holding up well, though marginally down on the same period last year, with the first signs of an economic slowdown affecting the residential housing sector.
Automotive Products sales, excluding associates and joint ventures, declined by
11 per cent to £544 million, largely as a result of foreign exchange movements. Nevertheless, ongoing progress in cost reduction and manufacturing improvements produced an operating profit before amortisation of goodwill of £46 million, up by £2 million on the first half of last year.
Approximately 60 per cent of Pilkington Automotive sales are in Europe. The Group's Original Equipment (OE) product sales in this region have grown faster than the market, with further new model introductions doing well and higher shipments of specialised transport applications. The European Automotive Glass Replacement (AGR) business has held up well. Overall, European Automotive profits rose by around 30 per cent, due to sustained improvement in manufacturing efficiencies, lower redundancy costs and relentless focus on cost reduction.
Approximately one third of the Group's Automotive business is in North America. Demand for Pilkington OE products was in line with the market, but sales were down on last year. In addition, price pressure in the aftermarket contributed to a fall in sales and profits in Automotive North America despite continuing efficiency improvements.
In South America, representing approximately five per cent of the Group's total Automotive glass sales, Pilkington sales were 11 per cent ahead of last year. A combination of higher sales, increased productivity and improved plant efficiencies resulted in operating profits moving ahead in the region.
Results in Australia show a decline on last year, reflecting local price pressures more than offsetting cost reductions and the closure of the New Zealand AGR business.
In China, where Pilkington is the leading foreign supplier of automotive glass, the vehicle market continued its rapid growth, with light vehicle production up by a further 25 per cent. Our Chinese automotive subsidiaries have continued to perform well, making ongoing improvements in all areas.
Associates and Joint Ventures
Profits in our Brazilian joint venture, Cebrace, improved by more than 25 per cent. The fourth float line at Barra Velha in Brazil, operated by Cebrace, is now fully operational.
The Groups associated manufacturing company in China, Shanghai Yaohua Pilkington Glass Co. Ltd. (SYP), in which Pilkington has a 19 per cent share, increased both sales and profits over the comparable period, as China experiences increased demand for more high performance glass in construction projects.
In Russia, work to complete the joint venture float plant in the Moscow region, built and operated by Pilkington, is well advanced, with the line expected to start up in mid 2005.
Sales in our 35 per cent Mexican associate Vitro Plan SA de CV (VVP) were up four per cent in US dollars on the first half of last year, though profits were affected by higher energy and freight costs.
Finance and Taxation
Interest costs at £30 million were £4 million less than in the first six months of last year, reflecting lower borrowings. Following the announcement of the results for the year ended 31 March 2004, Standard and Poors and Moodys confirmed their ratings of Pilkington bonds as BBB/BAA2, both having now moved from negative to stable outlook.
The underlying rate of tax on pre-exceptional profits has been reduced by three per cent to 30 per cent. This arises from a higher proportion of profits being generated in areas where local tax rates are lower, together with the Group's refinancing and restructuring arrangements.
Pilkingtons primary energy source in the Groups float plants is gas, and occasionally oil; in addition electricity accounts for approximately 30 per cent of Group energy costs. Direct energy costs represent approximately seven per cent of Pilkingtons total costs, though this varies between businesses. Following the sharp increase in the cost of gas in North America, in 2002 Pilkington introduced a surcharge on glass delivered to Building Products customers in North America. The recent surge in energy costs in other territories has led to the introduction of a similar energy surcharge on deliveries of glass to Building Products customers in Europe, beginning in November 2004.
Pilkington is following a clear three stage strategy: to continue to improve operational performance; to generate cash, initially to strengthen the Group financially; and, in the third phase, to invest the surplus cash generated into profitable growth opportunities. Pilkingtons extensive restructuring of recent years has led to significantly improved operational efficiency, as demonstrated by the improving trend of results. The Group is currently in stage two of its strategy, where it is demonstrating its capability to consistently generate cash and pay down debt. Conditions in most of our markets remain challenging, although the demand outlook is becoming somewhat more positive.