Summary

Stuart Chambers, Group Chief Executive, commented:

“As we indicated at the time of the Annual General Meeting, we expected difficult trading conditions in the current year. Our experience in the first half year confirms this view. The significant improvement in our competitiveness achieved over the last five years is helping to mitigate in part the impact of these tough markets, but the outlook for the current year remains challenging.”

Building Products

As explained at the Annual General Meeting, the markets for Building Products remain difficult, with the notable exceptions of the U.K. and Australia where demand has been strong. Against this trading background the internal action taken over time has strengthened materially Pilkington’s competitive position in this market.

The slowdown in continental European markets in the second half of last year continues to affect our European Building Products business, which represents around 60 per cent of Building Products’ sales in total. As a result of the reduced level of demand we extended the planned shutdown for cold repairs of our float glass plants at Gladbeck in Germany and at Venice, Italy. Both plants are now back to full production. Float selling prices have been under pressure, but have now stabilised at a level around 10 –12 per cent below the average for last year.

By contrast with continental Europe the market in the U.K. has been robust, underpinned by the rapid increase in the use of low emissivity glass in buildings, which has been a legislative requirement since 1 April. This has benefited both our primary and processing and merchanting businesses in the U.K.

Building Products North America, which accounts for approximately 15 per cent of Building Products’ sales, has been affected by the contraction in commercial building, which is its prime focus, although the residential market has been strong. In July the Ottawa float plant was taken down for repair and will be back in service in early October.

Sales of our 35 per cent owned Mexican associate VVP were marginally down in local currency terms, reflecting pressure on prices and the softness of the US economy, especially on the West Coast. Operating profits in sterling terms are below those of the first half of last year.

Although economic recession and currency devaluations in Argentina, and devaluations and political uncertainty in Brazil, made trading in these markets difficult, our South American operations have performed well, with earnings still running at a reasonable level. The Australian housing market continues to be strong and some glass products are in short supply. Results for the year to date of this business, which represents approximately 10 per cent of Building Products’ sales, are very encouraging. Though sales of our 19 per cent owned associate in China, SYP, continue to grow, pressure from new competitive floats will result in lower profits than the first half of last year.

Automotive

The European Automotive glass business accounts for approximately half the Group’s Automotive glass sales. European light vehicle sales and production were around 4 per cent down on the first half of last year, with only the UK market showing signs of growth. Demand for buses, coaches and trucks in Europe is beginning to improve and aftermarket (AGR) demand continues to be firm.

Despite lower vehicle production, Pilkington’s sales have held up due to new model introductions and solid AGR sales. The continuing benefits from the restructuring actions of recent years, together with our on-going improvement programme, are sustaining profits from the European Automotive business around the level of last year.

In North America, light vehicle sales have been maintained, assisted by OE manufacturers’ incentive programmes. Vehicle production is 5 per cent higher than last year, in a flat sales market, as vehicle inventories are replenished. In the AGR market in North America demand has softened.

Pilkington’s Automotive sales have reduced on last year, largely due to the end of the Ford supply contract. However, the results of the Automotive glass businesses are benefiting from operational improvements coming through, with efficiencies rising steadily, providing a consequential improvement in margins. Profits from the North American Automotive business are ahead of last year.

VVP’s auto glass sales have held up well overall as an increase in sales in the AGR market largely compensated for the impact of the slower OE segment. Plant productivity gains have improved profitability.

Demand for vehicles in South America has fallen with the economic recession. Nevertheless, whilst sales have been affected, operating profits have been maintained. Results of our Automotive OE business in Australia continue to be satisfactory.

Aerospace

Our Aerospace business continues to be affected by the slump in civil aviation markets. Nevertheless, sales and operating profits have been maintained at last year’s levels.

Finance

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

Also as indicated, priority is shifting to the generation of free cash flow. Despite the difficult market background and a heavy programme of cold repairs in our float plants this year, borrowings at 30 September are expected to be at a similar level to the end of last year.

VVP (Mexico) has recorded a non cash exchange loss on its borrowings which are denominated in US dollars. Despite this, Pilkington’s total interest costs for the year to date will be in line with last year.