SummaryStuart Chambers, Group Chief Executive commented:"Pilkington continues to make good progress through further improvements in manufacturing efficiency and cost reduction. Overall, trading is in line with our expectations and in the first half year pre-tax profits will be in line with the first half of last year, notwithstanding the impact of rising energy prices and the effect of the strong pound on our reported profits. The Groups continuing emphasis on the generation of free cash flow will enable us to report another strong cash performance."Building ProductsOutside Europe, Building Products markets are showing improvements. Efficiency gains and cost savings have continued, which will limit the impact of continuing weak European markets to a decline in operating profit of around 5 per cent for the business line as a whole.The European Building Products business represents two-thirds of total Building Products sales. Float prices across Europe are generally stable at about the same level as last year, except in the UK where they have weakened. The combination of competitive pressure in the UK market and the currency impact on a flat continental market means that overall operating profit will be down around 10 per cent on the first half of last year.The construction of our joint venture Float Glass plant in the Moscow region of Russia is progressing to schedule. The plant is planned to come on stream in the summer of 2005.Building Products North America, representing 15 per cent of Building Products sales, has been affected in recent years by the weakness in commercial construction, though there are signs that this market is now recovering. Operating profits in US dollars will be at similar levels to the same period last year.
In South America, our Building Products business continues to perform well. Market conditions in Brazil have strengthened and we continue to benefit 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 operating profits will be at a similar level to last year.
Original Equipment (OE) volumes were relatively strong, although the combination of a weak North American Automotive Glass Replacement market and adverse foreign exchange conditions have resulted in flat first half operating profits.
Just over 55 per cent of Pilkington Automotives sales are in Europe. The market for light vehicles has been relatively flat, but due to success with new models, Pilkingtons sales volumes continue to move ahead. The European AGR market has been relatively stable. The strong pound will depress the top line figure; nevertheless, as cost reduction efforts continue, overall profits in Automotive Europe will be up on last year.
Over 30 per cent of our Automotive business is in North America where light vehicle build is expected to be around 2 per cent higher than last year. However, due to the impact of exchange rates, higher energy costs and strong pricing pressure, particularly in the AGR market, North American operating profits will be down on last year.
In South America, the light vehicle market has risen 28 per cent. As a result of strong sales volumes and ongoing manufacturing efficiencies operating profits will be higher than last year.
Results in Australasia are down from last year, partly as a result of the closure of the AGR business in the region.
The Automotive glass joint ventures in China continue to expand as the market continues to grow.
Associates and Joint Ventures
Results from VVP (in which Pilkington has a 35 per cent stake) are expected to be down on last year, as VVP continues to suffer margin erosion in its markets.
The fourth float line in Brazil, built and operated by Pilkington for the Cebrace joint venture, is now fully operational.
In China, the Group's main investment, SYP, has seen both sales and operating 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.
Overall we anticipate an increase in the profit contribution from associates and joint ventures of around 10 per cent in the first half year.
Exceptional items in the first half year include the cost of closing the Building Products decorated glass operations in Australia and some Building Products processing and merchanting operations in Austria, offset by the profit on the disposal of our 50 per cent share in the joint venture investment in SDC Technologies Inc. in the United States. The net amount shown as exceptional items will not be material.
The Group remains committed to the generation of free cash flow through tight control of working capital and capital expenditure, allied to a continued drive to reduce costs throughout Pilkington. We will generate further free cash flow in the half year, albeit lower than the record level generated last year.
Interest costs in the first half year will be lower than the first half of last year, as a result of the reduction achieved in Group 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 strong pound negatively affected reported pre tax profits in the first half year by approximately £8 million, despite which reported profits were similar to the first half of last year.
Considering the background of continuing challenging market conditions, exacerbated by fuel price increases and the impact of the strong pound, Pilkington has started the year well.