PILKINGTON 2001 RESULTS: THE FULL STORY

Statement by the Chairman, Sir Nigel Rudd

I am pleased to report another year of progress by Pilkington.This performance has been achieved in the toughest market conditions we have seen for many years. It reflects the enormous performance improvement over the past five years to transform Pilkington into a highly competitive world-class company. Since 1997 Pilkington has almost doubled its profits and its levels of profitability place it at the top of the global glass industry. There is still more to go for, but we know precisely what has to be done and we have already put into place organisational and technical changes to bring this about. Pilkington has been able to demonstrate resilience and maintain profitability in difficult trading for a number of reasons. The increasingly competitive position the Group has attained underpins the results, with the delivery of benefits from the North American Step Change programme now beginning to contribute. New products such as Pilkington Activ self - cleaning glass, now in full production and on sale in many of our key markets, confirm Pilkington's position as the undisputed industry leader in technical innovation. In addition, several of our most profitable businesses, including our Automotive Glass Replacement businesses in Europe and North America, and our processing and merchanting businesses in Europe, are proving to be less susceptible to cyclical variations than others - a particular strength in an economic downturn.

The Board

On 14 May 2002, we announced some significant changes to our management structure. The first is the appointment of Stuart Chambers as Group Chief Executive, following the appointment of Paolo Scaroni as Chief Executive of Enel, Italy's largest electricity group. The second is the departure of Warren Knowlton and the appointment of Pat Zito to the Pilkington Board.

We are enormously appreciative of the significant transformation that Paolo Scaroni has achieved at Pilkington. In five years he and his senior team have transformed the Group from a loose confederation of under-performing glass businesses into a world leader in glass manufacturing with a strong management. We are delighted that he has agreed to stay on the Board as Deputy Chairman and look forward to his continued involvement with the Group.

Stuart Chambers, Pilkington Executive Director and President of Building Products Worldwide, has worked closely with Paolo during the transformation of the Group and the Board is delighted that he has agreed to become Group Chief Executive.

Following reorganisation of our Automotive OE businesses and the resultant elimination of Pilkington's internal geographic reporting structure, the position of President, Automotive Worldwide and President of Pilkington North America has ceased to exist. As a consequence, Warren Knowlton will leave the Group on 30 July 2002. I would like to take this opportunity to thank Warren for all he has done for Pilkington during his five years with the Group and to wish him every success for the future.

Pat Zito, who has been appointed President of Pilkington's global OE business unit reporting direct to the Group Chief Executive, was responsible for the integration and restructuring of Pilkington's European Automotive OE operations and the creation of a pan-European business and subsequently the merging of the European and North American OE operations into a single business. I am confident that Pat's experience will enable him to make a very positive contribution to the work of the Board.

In January 2002, Iain Lough joined the Board as an executive director and was appointed Group Finance Director succeeding Andrew Robb. Iain has been with Pilkington since 1993, most recently as Chief Financial Officer for Building Products Worldwide. Andrew remains an executive director, with responsibility for the Group's relationships with its major partners and affiliates worldwide and supporting the Group Chief Executive in the Group's growth initiatives. He is also responsible for the legal, secretarial, corporate affairs, information systems and supply management functions.

Financial results

Turnover from continuing operations, including joint ventures and associates, was
£2.8 billion, unchanged from the previous year. Operating profit before exceptional items and goodwill amortisation, including joint ventures and associates, was £293 million (2001 £294 million).

Profit before goodwill amortisation, exceptional items and taxation was £228 million, an increase of three per cent. After deducting goodwill of £10 million (2001 £6 million), profit before exceptional items and taxation was £218 million (2001 £216 million).

Exceptional items of £57 million were charged in the year including £42 million of restructuring costs in Group subsidiaries. The profit before tax after charging exceptional items was £161 million (2001 £172 million).

Earnings per share before exceptional items increased by seven per cent to 9.5 pence (2001 - 8.9 pence as restated after the introduction of FRS 19). The Board is recommending a final dividend of 3.25 pence per share, making a total for the year of 5.0 pence per share, the same as last year. Subject to approval by the shareholders at the Annual General Meeting, the final dividend, with scrip alternative, will be paid on 1 August 2002 to shareholders on the register at 14 June 2002.

The Group has adopted the new Accounting Standard on Deferred Taxation - FRS19. Accordingly, the Group's tax charge for the year was £61 million, 38 per cent of pre-tax profits, reflecting the mix of Group profits from different tax jurisdictions. Last year's comparatives have been restated following the adoption of this standard. Certain balance sheet values have also been restated and, as a consequence, reserves as at 31 March 2001 were reduced by £95 million. It is important to note that adoption of the new standard has no effect on the Group's cash or borrowing position.
Operating cash flow (profit before exceptional items plus depreciation and amortisation) was £406 million (2001 £397 million) and the net cash flow before dividends and management of liquid resources was £5 million outflow (2001 £6 million inflow).

Net borrowings at 31 March 2002 were £704 million (31 March 2001 £656 million). Cash interest cover was seven times (2001 six times).

During the year the Group obtained stable investment grade credit ratings and launched a successful debut Euro 350 million seven year Eurobond in October - the first issue after 11 September. This provided strong confirmation of the improved credit quality of the Group and was purchased by a wide range of investors.

Strategy

Cost consciousness remains our core focus as we continue to work to improve our position as the most competitive glass company in the world. At the same time, we seek revenue growth through the development and marketing of new products.

Pilkington Activ self-cleaning glass has captured the imagination of both the glass trade and consumers on either side of the Atlantic. Its unique dual-action performance offers tremendous potential for commercial and residential applications. Pilkington Automotive's solar control windscreens have gained wide market acceptance. Our new intruder-resistant glass has been launched on the new BMW 7 series and is expected to be adopted on higher volume vehicles over the next few years.

Although adopting a prudent approach to both acquisitions and the creation of new float capacity in the current climate, Pilkington's strong competitive stance places it in a good position to seek out opportunities that may emerge from the current downturn in the industry. Our new float plant in north eastern France is now in full production greatly strengthening our position in the French market. Our decision to postpone the planned joint venture second float line in Poland was justified by subsequent developments in the European market. Construction work has begun on the fourth joint venture float in Brazil at Barra Velha in the south of the country, which is on course to come on stream in 2003.


Review of operations

Building Products

Sales, including joint ventures and associates, were £1,464 million, up two per cent on the previous year. Operating profits improved by six per cent to £232 million. Our Building Products business is a global leader in cost competitiveness with the most efficient group of plants in the glass industry worldwide.

The Building Products businesses have performed well throughout the year despite an atypical decline of two per cent in industry demand for float glass in the major markets we serve.

Europe
Sales in the European Building Products business were marginally higher than last year with operating profits ahead once more.

This business, the largest in Pilkington, representing two thirds of the Group's Building Products sales, achieved better results in spite of mixed market conditions and a significant decline in demand in the second half year. Our ongoing cost consciousness has meant that despite tough market conditions, the manufacturing performance of our European float glass plants continues to improve.

One of the two float lines at Gladbeck, in Germany, was shut down for cold repair in January 2002. The plant start-up after the repair was originally planned for May 2002 but has been postponed until market conditions improve. The float tank at Porto Marghera (Venice) ceased production in April 2002 in readiness for its cold repair. It is planned that the second Gladbeck float will be repaired towards the end of this financial year.

A new integrated float and processing facility in France, involving a joint venture partner, was completed ahead of schedule, in time to support Building Products over the heavy European float repair programme in 2002. Its construction is a key component in the Group's European growth strategy.

A new on-line coating facility was completed at Weiherhammer in Bavaria, to supply the European launch of Pilkington Activ self-cleaning glass in March.

Production of Pilkington Pyrostop, the Group's market-leading fire-protection range made at Gelsenkirchen, Germany, was further expanded to meet continued strong growth in demand for this high value-added product.

Growth in other added-value products continued with demand for low emissivity Pilkington K Glass being boosted in the United Kingdom, as a result of the revised building regulations introduced by the Government in April 2002. These regulations, designed to reduce heat loss, and thus energy consumption, in buildings, effectively require the use of low emissivity glass for windows for both new build and refurbishment, bringing the United Kingdom in line with practice followed in Germany and Scandinavia for some years.

In the downstream Processing and Merchanting businesses, profits increased for the third year running, despite a reduction in European glass consumption. Steady improvements in productivity, allied to reductions in costs, were also achieved.

During the year, acquisitions were completed in France and the United Kingdom and selected branches within the European network were expanded.

All Processing and Merchanting customers in Europe now have the opportunity to place orders electronically. More than ten per cent of customer orders are already placed using e-Commerce and this is expected to grow substantially.

North America
Results of the North American Building Products business, which accounts for approximately 15 per cent of Building Products sales, improved during the year due to further cost reduction initiatives and the absence of major float glass repairs, following the repair programme of recent years.
The highlight of the year in North America was the successful launch of Pilkington Activ self-cleaning glass, which attracted widespread media and customer interest. Pilkington is the first glass company in North America to bring such a product to market and a large number of US fabricators and window manufacturers have now been certified to market and sell it.

In Mexico, Vitro Plan SA de CV (VVP), in which Pilkington has a 35 per cent stake, increased its sales overall, largely due to growth outside Mexico, following the acquisition of Cristal Glass in Spain. Consolidation of Cristal Glass sales offset the impact of the slowdown in the US and Mexican economies. Profits were restrained by the strength of the Mexican peso since a significant amount of sales are invoiced in foreign currencies.

South America
South American Building Products, with operations predominantly in Brazil, accounts for about seven per cent of Group Building Products sales. The region continued to provide good results during the year, though sales volumes and prices were affected by devaluations and the economic instability in Argentina.

All five float lines in the region performed well during the year and high yields were achieved. Cold repair of the Cebrace joint venture float line in CaÁapava, after twelve years in operation, started in February and was completed in May.

Construction of an additional float line in southern Brazil commenced in February. This facility will be built and operated by Cebrace, the joint venture between Pilkington and Saint Gobain. The plant, which will have a sales capacity of approximately 200,000 tonnes per year, is scheduled to start operations in 2003. Asia Pacific

The Australian housing market was very slow at the start of the year but strengthened considerably as the year progressed. The results of the Australian Building Products business, which represent eight per cent of Building Products sales, improved as a consequence.
The Group's associated company in China, Shanghai Yaohua Pilkington Glass Co Ltd (SYP), continued to perform well. During the year SYP acquired control of Guangdong Float Glass, which owns a float glass line in southern China.

Automotive Products

Sales during the year, including joint ventures and associates, were £1,275 million, a reduction of six per cent on the previous year. Operating profits reduced by 16 per cent to £79 million.
Following the structural changes completed within our North American Automotive Products business, Pilkington has now combined its Original Equipment (OE) operations into a single worldwide business unit. This enables the Group to serve its global customers better and facilitates the implementation of best practice across Automotive Products, paving the way for a significant improvement in operational performance.

Europe
Although results were affected by the economic downturn in continental Europe, the European Automotive business, which accounts for nearly half of the Group's automotive glass sales, continued to drive through improvements in product quality and manufacturing productivity.

Sales in the OE business experienced a slowdown compared to the previous year, due to a decline in demand in some markets, and a reduction in volume of some large programmes as they approached the end of their model life. In addition, start-up of replacement models was slower than anticipated. Sales are expected to recover as the new model transitions are completed.
New product development was again a key area and during the year an advanced intruder-resistant, side glazing product was launched. With vehicle manufacturers increasingly emphasising security features, this type of glazing should feature significantly in future.

The European Automotive Glass Replacement (AGR) business demonstrated further profitable growth, assisted by reductions in both manufacturing and distribution costs. The aftermarket was strong, with some market gains, but the specialist, original equipment market of buses, coaches and trucks was weak. Complexity of these products continues to grow, helping to offset the downturn in volumes.

North America
In the North American Automotive business, which accounts for over 40 per cent of automotive revenues, sales declined during the year following an overall fall in light vehicle production and completion of a large short-term contract for Ford, which had been anticipated for some time.

During the year, structural changes to the North American Automotive business were completed to schedule. This resulted in the long planned closure of two automotive fabrication plants; at Sherman, Texas, and Lathrop, California. Since then, the emphasis has shifted to improving operational performance in the remaining facilities and better levels of quality, productivity and higher levels of efficiencies have already been achieved.

The AGR business in North America has been successfully turned round from its loss-making position of three years ago and is now making good returns.

The AGR business model has been completely re-engineered, including pricing policy, substantially improving the route delivery system, implementing best practices and customising each service centre to the needs of its local market. In addition, its successful e-business programme, through which 40 per cent of its sales are implemented, was expanded to include a wide offering of glass products and accessory parts to customers, with a seamless on-line ordering system, from product look-up through to delivery.

In Mexico, the automotive division of Vitro Plan SA de CV (VVP) experienced a reduction in demand in the OE market, which accounts for 16 per cent of its revenues, but increased its AGR sales. Profits were also adversely affected by a decline in prices.

South America
The South American Automotive glass business was again able to produce good results, despite a sharp reduction in demand in Argentina.

A new plant to supply bus windscreens for local customers was opened in Brazil. Business continued to grow with a new contract to supply windscreens and side glazings to Volkswagen.

Asia Pacific
Profitability in Australia continued to rise, due to higher productivity and yields and a further reduction in overhead costs. Demand remained stable with exports exceeding 30 per cent of total sales.

In China, plant operating and financial performance continued to improve. Strong sales growth continued, with 30 per cent of output being exported to the USA and Europe.


Pilkington Aerospace

The events of September 2001 had a significant adverse impact on the aviation industry and its suppliers. Nevertheless, Pilkington Aerospace was able to react quickly to the dip in the civil aviation sector by securing long-term commitments in the business jet market with Learjet, Cessna and Embraer.

Sales for military aircraft increased as the US Defense Department augmented its spares inventory. During the year Pilkington Aerospace was selected by Lockheed Martin to supply the integrated transparency system for the new Joint Strike Fighter, the largest military aircraft programme in history. It has also been chosen to supply the Saab Gripen JAS 39 aircraft.


Prospects

Pilkington is operating in tough trading conditions for a second consecutive year and we expect challenging markets for most of the coming year. Float prices in Europe are down but not expected to deteriorate further. In Automotive, production remains subdued, but prices are stable. Overall, we expect to see progress this year in the United States and in Automotive, with some deterioration in Building Products.

Pilkington will continue to drive down its cost base, benchmarking across the Group to achieve higher levels of productivity and efficiency. Demand for our products is increasingly driven by requirements for sophisticated and added-value glass, and we will continue to invest in their development. A competitive manufacturing base and a strong portfolio of innovative products should ensure that Pilkington remains resilient even in challenging times, consolidating its position as the world's leading global glass company.

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