Pilkington Group: Review of Operations
Building Products
Building Products’ sales, including joint ventures and associates,
were £1448 million, similar to the previous year. Operating profits
fell by 13 per cent to £142 million. This was predominantly due
to continued downward pressures on selling prices in Europe, coupled with
weak demand on the Continent. Profits improved in North America, despite
slow growth in commercial construction.
The Group’s Building Products business remains a market leader. Internally,
a global initiative is focusing on cost reduction throughout the business
line, with new programmes being launched to reduce overheads further and
improve production efficiency. The effect of such programmes is already
apparent in the North American business, with last year’s restructuring
now paying dividends and a significant reduction in overheads showing
through in the 2004 results.
Although capacity utilisation remains low in Europe, the absence of new
float builds planned in the next two years should see the gradual restoration
of an appropriate balance of demand and supply, particularly if there
is an acceleration in growth rates. In North America office vacancy rates
have begun to decline, raising speculation that commercial building rates
will pick up next year.
Meanwhile our plans for efficiency improvement continue to position our
Building Products business well for any upturn in demand.
Europe
During the year, the European Primary Products and Processing and Merchanting
businesses were combined to form Building Products Europe, Pilkington’s
largest single business. The new business unit represents 59 per cent
of Pilkington’s Building Products sales, including joint ventures
and associates, and with an integrated strategy and management will provide
further opportunities for improving cash management and for reductions
in the cost base.
Despite continuing challenging market conditions in Continental Europe,
sales volumes were marginally up on last year. In a strongly competitive
environment, price declines which began back in 2001 have continued, with
average float prices falling by around 14 per cent in the last financial
year. In response significant improvements in manufacturing performance
were made during the year, further reducing costs, while a restructuring
of the Group’s coating operations in Germany and Sweden is underway.
One of the two float glass lines at Gladbeck was repaired and upgraded
during the final quarter of the year. A cold repair was also carried out
on the profiled glass furnace in Schmelz, Germany.
Production of the Group’s high value-added clear fire protection
range, the market-leading Pilkington Pyrostop™, was again increased
in Germany during the year to meet continuing strong growth in demand
for this product.
UK sales of low-emissivity Pilkington K Glass™ were once again strong,
although the rapid growth following the upgrade in UK building regulations
is now levelling off. Outside the UK, the general competition and resulting
price pressure on semi-finished glass products, such as off-line coated
glasses and insulating glass units, has continued.
Pilkington Activ™, our innovative self-cleaning glass, registered
steady growth across Europe following on from its launch in 2002. The
Pilkington Activ™ product range has been further developed in tandem
with high performance solar control coatings. These dual-coated products
strengthen the Group’s competitive position in the commercial building
markets.
An announcement was made in September 2003 of the Group’s intention
to build and operate its first float glass plant in Russia, in a joint
venture with Emerging Markets Partnership. Scheduled to come on stream
in 2005, the plant will be situated in the Ramenskoye district of the
Moscow Oblast and will have a capacity of around 240,000 tonnes of glass
per year. Civil engineering work on the project is already well underway.
North America
In the North American Building Products business (which, including joint
ventures and associates, accounts for about 22 per cent of Building Products
global turnover), sales volumes decreased but profitability went up, due
to improved manufacturing performance, better sales mix and savings realised
through cost reduction initiatives. The residential sector in North America
is still strong though the commercial sector showed little sign of improvement.
The Building Products business in North America is now better positioned
to take advantage of an upturn in the US economy, particularly in the
commercial sector.
In Mexico, Vitro Plan SA de CV (VVP), in which Pilkington has a 35 per
cent interest, reported lower sales, despite recovery of the Mexican market
and ongoing growth in Iberia.
South America
South American Building Products, including the Cebrace joint venture,
with operations in Brazil, Argentina and Chile, accounts for approximately
eight per cent of total sales for the Building Products business.
In Brazil inflation fell and the exchange rate stabilised, but low growth
rates and a fall in construction activity led to a dip in the demand for
float glass. Export sales, however, greatly improved, compensating partly
for the weak domestic market. The start-up of the fourth float line in
Brazil, to be operated by Cebrace, the joint venture between Pilkington
and Saint-Gobain, is scheduled for July 2004.
In Argentina the economy grew strongly after two years of crisis, with
the construction industry leading the economic resurgence. Consequently,
demand for float glass rose sharply, with Pilkington maintaining its market
share. In Chile, the construction sector experienced another quiet year.
Asia Pacific
In Australia and New Zealand, which represents nine per cent of the Group’s
Building Products sales, continuing strength in residential housing markets
has sustained glass demand. Pilkington’s value-added products have
fared well, primarily due to the robust home improvement and refurbishment
sector. The combination of high demand coupled with ongoing manufacturing
efficiency improvements ensured that Building Products Australasia again
produced good profits and cash results.
The re-focused Building Products New Zealand business attained record
profits in an economy which grew by over three per cent. Growth was on
the back of strong household spending and an increase in the construction
of new dwellings, driven by high net immigration. Commercial construction
activity was also high.
Economic growth in Asia remained strong. China once again led the way,
with another year of growth in GDP above eight per cent. Domestic demand
for both float glass and processed architectural products remains strong,
and the market grew by more than ten per cent. Pilkington’s high
performance architectural float glass products continue to sell well in
the region. Prices improved towards the end of the year, and the Group’s
associated manufacturing company in China, Shanghai Yaohua Pilkington
Glass Co. Ltd. (SYP), in which Pilkington holds a 19 per cent share, reported
a 30 per cent improvement in profits. SYP acquired its fourth float glass
line in January 2004, in Tianjin, and a new US$35 million architectural
glass factory in Shanghai has started production.
Automotive Products
Automotive Products’ sales were £1250 million, down three per
cent from the previous year. Operating profit, however, improved by 20
per cent to £89 million. During the year, the business line launched
a further business improvement initiative, designed to ensure that Pilkington
is able to improve competitiveness in order to win new contracts profitably
against tough competition from established and emerging markets. This
will continue to stimulate the on-going drive for improved operating efficiencies,
reduced costs and higher profitability.
Pilkington Automotive operates as a single global organisation serving
the Original Equipment (OE) and Automotive Glass Replacement (AGR) markets.
All operations have now been combined into an integrated worldwide business
unit, across all regions and distribution channels. The effects of these
organisational changes, coupled with restructuring activities in North
America, and relentless focus on reducing costs and improving quality,
are already apparent.
The past year has seen the highest concentration ever of new model introduction
activity in the Automotive OE business. Pilkington Automotive has been
involved in more than 50 new product launches, from the luxury Maserati
Quattroporte and the high-volume Astra in Europe, to the new Ford Barra
in Australia and the General Motors Chevrolet Malibu and Toyota Solara
in North America. Vehicle manufacturers are increasingly introducing niche
models using the same platform. In addition, lead times for vehicles are
being cut by as much as half, to eighteen months or even less, compared
with a traditional development period of around three years.
Industry expectations are for a modest increase in production of light
vehicles in North America this year, and for steady demand in Europe.
Pilkington continues to expect to grow faster than the market in Europe,
through success with new models and specialist applications. In addition
our plans for further improvement in efficiency, quality and customer
service should again show through in the results for the current period.
Europe
Overall light vehicle production in Europe was essentially unchanged from
the previous year. However, sales by our European Automotive business,
accounting for 53 per cent of the Group’s Automotive sales, increased
by six per cent. This was due to gains on new model introductions and
increased demand for specialised applications in the bus, coach and truck
markets.
Increased product complexity is an important factor in the OE market,
leading to growing sales of solar reflective windshield glass, intruder-resistant
side glazing and heated wired products. This trend will continue as vehicle
manufacturers emphasise the advantages of increased security and noise
reduction. Designs for future vehicles show increases in glass content
through panoramic windshields and all-glass sunroofs.
Total value of the aftermarket continues to grow in line with increases
in the adoption of high value-added windscreens, such as infrared reflective
and wire-heated, together with those containing extra components such
as rain sensors and extruded profiles. As a major OE supplier with access
to all these technologies, Pilkington is able to offer a wide and attractive
product range to its customers. Demand dipped in the second half of the
year, though operations in Germany and France are benefiting from the
reconfiguration of warehouse and logistic operations, improved service
levels and extended range availability.
North America
OE light vehicle production in North America declined from the previous
year by four per cent, as North American vehicle manufacturers continued
to reduce dealer inventory levels.
However our North American Automotive business (which, including associates,
accounts for 39 per cent of the Group’s Automotive sales), showed
significant operational improvement again this year, after completing
the restructuring programme. Sharing best practice across all businesses
continues to strengthen the infrastructure in North America, as evidenced
by growing business won with Toyota, Nissan and Honda and new business
secured with DaimlerChrysler.
However, due to the more competitive pricing in the AGR market, total
operating profits in North American Automotive fell by five per cent.
In Mexico, VVP’s turnover in its automotive operations declined by
about 20 per cent, due to competitive pressures in the domestic market.
Sales to the OE market were down year-on-year due to weak demand in both
domestic and export markets. The current year decline in OE was compensated
for by sales to the export AGR market, although pricing pressures in those
markets continues.
South America
Pilkington’s South American Automotive business represents five per
cent of the Group’s Automotive operations worldwide. South American
vehicle production increased by three per cent as vehicle manufacturers
built inventory for the expected increase in the economy, as well as for
the export market.
Production and sales from Pilkington operations increased as they also
serve as a manufacturing base for exports into the Group’s distribution
networks in North America and Europe. This sales improvement, combined
with continued improvements in production efficiency, resulted in significantly
improved profitability, despite high inflation and difficulties in cost
recovery.
Asia Pacific
Results in Australia showed an improvement over last year in a favourable
trading environment as light vehicle production increased by eight per
cent. Profits improved once more, reflecting higher sales and continued
manufacturing improvements and efficiency gains in the plants.
The Chinese automotive market continues to grow rapidly with two million
passenger cars built in China in calendar year 2003, double the level
of 2002. Pilkington is the leading international automotive glass manufacturer
in China, and is well positioned to service this growing market with our
automotive glass subsidiaries and associates providing wide geographical
coverage. Sales and profits increased over the previous year and the plants
are benefiting from increased integration into the Group’s global
Automotive organisation.
Prospects
We do not expect to see significant improvement in trading conditions
in our major markets this year. However Pilkington is already well advanced
with internal programmes designed to ensure that we stay ahead of the
competition and build on the operational gains of the past six years.
Our focus on cash generation will again be vigorously pursued this year,
aimed at a further reduction in Group borrowings, as Pilkington prepares
for future profitable growth.