Summary

Stuart Chambers, Group Chief Executive commented:

“As has been the case for some time, trading conditions remain challenging in most of our major markets. Nevertheless, our achievements in improving the competitiveness of our manufacturing base, which is now as robust as any of our competitors, means that we are now much more resilient. Trading has been in line with expectations and our headline profitability is set to see a continuation of the consistent level reported in each of the last two financial half-years. In addition our renewed emphasis on free cash flow generation will enable us to report our strongest cash performance since 1994.”

Building Products

Building Products markets have continued to be weak, with the notable exceptions of the UK and Australia. Efficiency improvements and cost savings have helped offset some of the pressure, though Building Products trading profit in total will be down approximately 20 per cent on last year.

In Europe, our Building Products business, the largest single business in the Group, representing 60 per cent of total Building Products sales and 30 per cent of Group sales, has been adversely affected by the economic situation, particularly in Germany. Float prices are down by about 10 per cent on average, although the price falls were mitigated by reductions in capacity through plants being taken out of service for extended cold repairs.

Trading performance in the UK, which has held up well, has been strong, helped by rising sales of Pilkington 'K' glass following legislative changes requiring the use of energy-saving glass.

The European downstream business continues to demonstrate robustness in the prevailing economic conditions. Profits in this business will be above the levels achieved last year.

Building Products North America, representing 15 per cent of Building Products sales, has been adversely affected by weakness in commercial construction, where Pilkington is the leading North American glass supplier. Office vacancy rates are still high, making near-term improvement in the market unlikely. However, the Ottawa float plant is now back in full production following a cold repair and the benefits of the North American Step Change programme continue to come through, improving efficiencies and reducing costs, leading to a welcome improvement in profitability in the second half year.

Sales of our 35 per cent owned Mexican associate, Vitro Plan SA de CV (VVP), declined by approximately 5 per cent due to a slowdown in the domestic Mexican economy and in the non-residential construction sector in the US, as well as competitive pricing pressure. Profits were also impacted by a one-off charge for the write off of inventories. The impact of these factors was only partially compensated by increased sales at Vitro Cristalglass in Spain.

Despite difficult trading conditions in South America, exacerbated by political uncertainties, our Building Products businesses have continued to perform well. In Brazil the stabilised political climate following last year's elections is helping trading and our joint venture float business, Cebrace, has had another successful year. As explained in our interim statement, in view of rapidly rising inflation in Argentina, from 1 April 2002 the results of our operations in that country have been reported using hyperinflation accounting principles. Even on this conservative approach, the results of our Building Products business in Argentina have held up well, based on gains in domestic market share and increased exports.

The performance of our Australian business has been encouraging. Cost reductions and a robust trading environment will once again enable this business to report improved profits.

Sales of the Group's 19 per cent owned Chinese associate, SYP, showed modest growth, due to the inclusion of a full year's production from the Guangdong plant, repaired last year. Profits were down, however, principally due to a reduction in glass prices.

Automotive

Half the Group's Automotive glass sales are generated in Europe. In the European Original Equipment (OE) market, light vehicle production dipped by approximately 2 per cent. However, for Pilkington this was offset by good gains on new model introductions. Demand for specialised OE applications (bus, coach and truck) has improved in recent months after a poor start to the year. Profits will be slightly below last year's levels.

The European Automotive Glass Replacement (AGR) business has held up well following last year's strong performance. It continues to demonstrate resilience to cyclical downturns.

The performance of our North American OE business, which represents nearly 25 per cent of our total worldwide Automotive sales, has shown significant operational and financial improvement. Light vehicle build in North America was approximately 6 per cent higher than the previous year which, combined with cost savings from the Step Change programme and improving manufacturing efficiencies, has resulted in a return to profitability for this business. The North American AGR business, which represents nearly 20 per cent of our total Automotive sales, will report another strong trading performance, broadly in line with last year's good result, in a market down by around 5 per cent.

In Mexico, VVP's automotive glass sales were affected by constant price pressure and a decline in volumes in the OEM segment, partially compensated by increased sales to the AGR market. Increased material and freight costs also impacted profits.

In South America, representing 5 per cent of total Automotive sales, vehicle production fell by 8 per cent as economic uncertainty weakened both OE and AGR markets. Despite this, high productivity and improved plant efficiencies have resulted in trading profits in the region similar to last year.

Results in Australia will show an improvement over last year, reflecting efficiency improvements and a more favourable trading environment.

Aerospace

Results from Pilkington Aerospace are also expected to be above last year's levels. There has been some strengthening in the military aviation market, though civil aviation remains weak.

Growth

Pilkington continues to benefit from a progressive shift toward higher value added products in both Building Products and Automotive markets. We have seen increased usage of energy saving Pilkington 'K' glass in the UK, while sales of advanced fire protection products continue to increase in importance. Despite being launched in an economic downturn, uptake of Pilkington Activ™ self-cleaning glass is steadily rising and we remain optimistic about the long term prospects for this exciting product.

Construction of the fourth float line in Brazil, to be operated by Cebrace, our joint venture with Saint Gobain, continues. Start-up has been postponed because of economic conditions in Brazil and the plant is now planned to begin production next year.

Pensions

The biggest pension scheme by far in Pilkington is the UK scheme, which is effectively a defined contribution scheme, where the Company contribution is fixed. Including the UK scheme, 90 per cent of Pilkington employees are covered by defined contribution pension schemes. Of the 10 per cent in defined benefit schemes, the two largest, in Germany and North America, have been closed to new entrants for several years. Pilkington is therefore relatively well placed to cope with the consequences of declines in stock markets worldwide, which have had a marked effect on many company pension schemes.

Finance

As indicated at the year end results presentation, from 1 April 2002 Pilkington will charge the costs of ongoing restructuring costs to operating profit. The cost this year is expected to be between 1 and 1½ per cent of turnover.

Total interest charges of subsidiary companies will be a little less than last year. Pilkington's share of associates and joint ventures interest will be around £10 million higher due to non-cash exchange losses on US dollar borrowings in VVP. Consolidated Group borrowings at the year end, taking into account the preference shares (see below), will be reduced from last year's level.

In March, £190 million of preference shares were refinanced using existing committed bank facilities. New committed bank facilities totalling £280 million, with a 5-year term, have been arranged, providing additional flexibility. Our emphasis is now firmly on free cash flow generation from existing business. The substantial improvement in cash generation demonstrated at the interim stage has been continued into the second half year.