The tax charge in the income statement of £24 million (2004 £22 million) reflects a tax rate of 24 per cent (2004 27 per cent) on the Groups reported profit before taxation of £99 million (2004 £81 million). This rate appears lower than under UK GAAP and arises partly from the changed disclosure of the tax applicable to joint ventures and associates, which is now charged before striking the Groups profit before tax.
Earnings and dividend
The profit attributable to equity shareholders has increased 31 per cent from £52 million in 2004 to £68 million in this half-year. Basic earnings per share have increased by 29 per cent from 4.1 pence per share in 2004 to 5.3 pence per share in the half-year to 30 September 2005.
The interim dividend has been increased to 1.8 pence per share from 1.75 pence per share consistent with our progressive dividend policy introduced at the preliminary results in May 2005. The dividend will be paid on 16 December 2005 to shareholders on the register on 2 December 2005.
Cash flow and borrowings
Free cash flow (defined as cash flow before expenditure on acquisitions, net of divestments and the disposal of property, plant and equipment and investments) amounted to £69 million (2004 £94 million). This reflects Pilkingtons continuing emphasis on generating cash from its businesses. As a result, the Groups net debt has fallen by £90 million in the last 12 months.
Although competition remains intense in most major Building Products markets, revenues nevertheless improved by 1 per cent on the same period last year, rising to £616 million. The drive for improved efficiencies further lifted profits for the Building Products business to £69 million, an increase year-on-year of 10 per cent.
Building Products Europe, representing around two-thirds of total Building Products sales, has seen signs of recovery in some continental markets, but overall market conditions remain difficult. Prices of standard float continue to fall across the region and the UK market in particular is currently experiencing low demand and high levels of competition.
Despite this, operating efficiencies and an overhaul of the management and administrative structure helped to increase profits in the region. Last year's restructuring improved the overall European result, helped by continuing strong sales of Pilkington Pyrostop Fire Protection glass. The European energy surcharge continues to mitigate the impact of rising energy costs.
Building Products North America, representing 13 per cent of total Building Products sales, is concentrated on the commercial construction market, which remains depressed. Although improvement is still expected in the medium term, recovery is unlikely in the current financial year.
In South America, the Groups Building Products business continues to perform well, with demand for float glass continuing to grow strongly in Argentina, Brazil and Chile. Although there has been some slowdown in the residential construction sector in Australia, the economy generally remains strong, and the business has turned in another good performance.
Pilkington Automotive Original Equipment (OE) volumes were robust, due in part to several successful launches of vehicles in which Pilkington products are fitted. The North American Automotive Glass Replacement (AGR) market has stabilised and AGR sales in Europe have improved. As a result, Pilkington Automotive sales increased 15 per cent to £630 million and operating profits of £61 million were £13 million or 27% up on the first half of last year.
More than 55 per cent of Pilkington Automotives sales are in Europe. The market for light vehicles has been flat, but once again, due to success with the introduction of new models, the Groups sales volumes continue to grow. The European AGR market has been stable. Sustained emphasis on efficiency improvements and cost reductions has helped counter continuing price pressure and rising energy-related costs. As a result, profits in Automotive Europe exceeded the same period last year by 40 per cent.
Over 30 per cent of Pilkingtons Automotive business is in North America, where light vehicle build is expected to be around 1 per cent up on last year. The Groups sales to OE manufacturers are higher than last year. In AGR North America, the acquisition of the Autostock Distribution branches has started to flow through into increased sales. North America continues to experience significant price pressure and higher energy costs, but the benefits of increased volumes, operational efficiency improvements and cost reductions resulted in profits 20 per cent above those of the first half of last year.
In South America, light vehicle demand has risen 10 per cent. Strong sales volumes and ongoing manufacturing efficiencies have helped increase operating profits over the same period last year. Results from operations in Australasia have also improved, partly as a result of stronger market volumes, though overall profits were affected by the costs of restructuring the business to face increased import competition. In China, the market continues to expand rapidly and increased emphasis is being placed on developing the cost and operational efficiency of our profitable businesses there.
Joint ventures and associates
Under IFRS the results from joint ventures and associates are disclosed differently from those previously shown under UK GAAP. Pilkington now reports its share of the post-tax profits of joint ventures and associates as a one line item, prior to disclosing the Groups profit before tax. Overall, the share of profits after tax from joint ventures and associates has declined from £11 million in the half-year to September 2004 to £2 million in the half-year to September 2005.
Trading difficulties in Mexico have led to deterioration in Pilkingtons share of the result from Vitro Plan SA de CV and subsidiaries (VVP). Additionally, as expected, start-up costs have been incurred at the Groups new Russian joint venture float line with Emerging Markets Partnerships, which is due to be commissioned shortly.
The Groups other principal joint ventures, Cebrace in Brazil and Pilkington Glass France, continue to trade at similar levels to last year.
The primary energy source for the Group's float plants is gas, and occasionally oil. In addition, electricity accounts for approximately 35 per cent of Group energy costs. Direct energy costs represent approximately 10 per cent of Pilkington's total costs, though this varies between businesses. Following the sharp increase in the cost of gas in North America, in 2000 Pilkington introduced a surcharge on glass delivered to Building Products' customers there. A similar energy surcharge on deliveries of glass to Building Products' customers in Europe was introduced in November 2004, and these measures have helped to offset the impact of increased energy costs during the period.
Statement re possible offer for the Company
A separate announcement has been made contemporaneously with this statement.
Pilkington continues to follow a clear three-stage Cash for Growth strategy. Over the course of this financial year our priorities are to maintain momentum on the cost reduction programme, started in Stage 1, to complete the rebuilding of our financial strength, begun in Stage 2, and to begin the transition into Stage 3, with targeted, disciplined investments into profitable growth opportunities.
The Pilkington-constructed fourth float line in Brazil for our South American joint venture is now in full production, following an excellent start-up. A sound base has been established in China as a platform for future growth, with the three Automotive plants now fully integrated into the global Pilkington Automotive business. The commissioning of the joint venture float line in Russia is due to be completed soon.
Although conditions in most of our markets remain challenging, Pilkington is sustaining its internal programmes to maintain the Groups competitiveness and we have continued confidence for the full financial year.