OPERATING AND FINANCIAL REVIEW Making glass for the world s buildings and vehicles

Transcription

1 OPERATING AND FINANCIAL REVIEW 2005 Making glass for the world s buildings and vehicles

2 Pilkington plc is one of the world s largest manufacturers of glass and glazing products for the building and automotive markets. Employing 23,800 people, we have manufacturing operations in 24 countries and sales in over 130. With our joint ventures and our associates, we have the widest geographical reach of any glassmaker, enabling us to respond to customers whose operations are increasingly global. Geographically, over half our sales are in Europe, approximately a third are in North America, and the rest are primarily in South America and Australasia. Our operations centre on two worldwide business lines: Building Products, supplying original equipment and refurbishment glass for the world s buildings; and Automotive Products, supplying glass and glazing systems to the original equipment and replacement glazing markets. 1 Financial highlights 2 Chairman s statement 4 Our company 6 Our industry 8 Group chief executive s review 12 Our strategy Review of operations: 14 Building Products 18 Automotive Products 22 Finance director s review 26 Our processes 28 Our responsibilities 34 Board of directors 35 Summary directors report 35 Summary remuneration report 40 Summary financial statement 45 Independent auditors statement to the shareholders of Pilkington plc 46 Shareholder information 48 Shareholder contacts Further information

3 FINANCIAL HIGHLIGHTS Operating profit including joint ventures and associates up from 213 million* to 231 million Profit on ordinary activities before taxation, amortisation of goodwill and exceptional items up from 152 million* to 180 million, equivalent to an increase of 26 per cent at constant exchange rates Earnings per share before taxation, amortisation of goodwill and exceptional items up 19 per cent from 7.5p* to 8.9p; basic earnings per share up from 6.3p* to 7.8p (plus 24 per cent) Another year of strong free cash flow at 172 million Net debt again reduced, by 14 per cent in the year, from 664 million to 572 million 1 Final dividend increased to 3.35p ( p), increasing to 5.1p for the full year, the first increase in the dividend for a decade 70 new model launches in Pilkington Automotive a record 2,754 2,751 2, * * TURNOVER m (including share of joint ventures and associates) OPERATING PROFIT m (including share of joint ventures and associates) PROFIT m before goodwill amortisation, exceptional items and tax CASH FLOW m from operations *Restated for change in accounting policy re UITF 17. (Note 1 on page 43).

4 CHAIRMAN S STATEMENT 2 Sir Nigel Rudd Chairman Pilkington has once again delivered results well ahead of the previous year. We have seen a good performance in Automotive, with Building Products holding up, despite variable trading conditions in our markets around the world. The Group continues to benefit from improvements in operational efficiency and continuous cost reduction programmes. Energy surcharges on Building Products deliveries in Europe and North America have helped to alleviate the significant cost pressure from rising energy prices. The Automotive business has been involved in a record number of new product launches over the year and has benefited from strong sales of many existing models equipped by Pilkington. Building Products results in Europe were affected by low industry capacity utilisation, but outside Europe Building Products results continued to improve. FINANCIAL RESULTS Although turnover from continuing operations, including joint ventures and associates, decreased two per cent to 2.7 billion, at constant exchange rates this was equivalent to an increase of two per cent. Operating profit from Group businesses increased by 15 million to 195 million. Operating profits from joint ventures and associates also increased from 33 million to 36 million, principally due to improved results in Cebrace and Shanghai Yaohua Pilkington, offsetting the profit decline at Vitro Plan SA de CV and its subsidiaries in Mexico. Overall operating profit increased by eight per cent from 213 million (as restated) to 231 million in Profit before goodwill amortisation, exceptional items and taxation increased from 152 million to 180 million, with lower interest charges on reduced borrowings contributing as well as improved profits from operations. After deducting goodwill amortisation of 8 million ( million) and exceptional items arising principally from the sale and termination of operations of 7 million ( million), profit before tax was 165 million, an increase of 20 per cent on the 137 million (as restated) achieved in A continued focus on cash generation has enabled Pilkington to report a further reduction in net debt. Net borrowings fell from 664 million in 2004 to 572 million at 31st March This takes the total reduction in debt in the last three years to 348 million, or nearly 40 per cent. The Group remains on track to begin its transition into the third phase of its strategy over the course of the next financial year, with targeted investments into profitable growth opportunities that meet our strict criteria for financial returns in our core business areas. Earnings and dividends Earnings per share before exceptional items and amortisation of goodwill increased from 7.5 pence (as restated) to 8.9 pence, up 19 per cent. Basic earnings per share increased from 6.3 pence (as restated) to 7.8 pence, an increase of 24 per cent.

5 This is another strong set of results from Pilkington. The Group continues to benefit from improvements in operational efficiency and continuous cost reduction programmes. Our continuing focus on cash generation enables us to report a further significant reduction in net debt. Adoption of a progressive dividend policy is an indication of the board s growing confidence in the capability of the business to generate cash sustainably. Over the course of the next financial year, we expect to begin the transition into Stage 3 of our Cash for Growth strategy, with targeted investments into profitable growth opportunities. 3 The board is recommending an increase in the final dividend to 3.35 pence per share, bringing the total for the year to 5.1 pence. The dividend is covered over two and a half times by free cash flow. This is the first increase in the dividend for ten years. Subject to the approval of shareholders at the annual general meeting, the final dividend will be paid on 1st August 2005 to shareholders on the register at 10th June Cash flow and borrowings Free cash flow was again strong and amounted to 172 million ( million). As expected, net cash flow before financing of 113 million was down on the record level of 188 million achieved in Net borrowings fell from 664 million in 2004 to 572 million at 31st March 2005, successfully achieving an objective of the Group for Stage 2 of its programme. This takes the total reduction in the last three years to 348 million, including the redemption of preference shares. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) These results will be the last that Pilkington reports under UK GAAP. At 1st April 2005, Pilkington, in order to meet the requirement for European Union listed companies to report under IFRS for periods commencing on or after 1st January 2005, moves to reporting under IFRS. The results to be reported for the half year to September 2005 will include reconciliations between UK GAAP and IFRS as required under IFRS 1. Pilkington has planned for this transition for over two years and although there will be changes to the UK GAAP results and balance sheet as previously reported, the changes will not mask the underlying improving trends in the robustness of Pilkington s business. Pilkington will release a restatement of its 2005 results under IFRS in September STRATEGY Pilkington continues to follow a clear three-stage strategy, the stages of which are: First to improve the operational fitness of the businesses; Second to produce net free cash from operations, initially to reduce debt; and then Third to invest net free cash in future profitable growth. Over the past seven years, radical improvements have been made in the Group s manufacturing performance, with significant reductions in overheads across the business. Management attention remains focused on the generation of net free cash and achieving further internal economies. The Group remains on track to begin the transition into the third phase of its strategy over the course of STAKEHOLDER COMMUNICATIONS Good communications with all our stakeholders are a priority for Pilkington and the Group s efforts in this area were publicly recognised over the past year. Pilkington won the Communication of Corporate Strategy award in the PricewaterhouseCoopers 2004 Building Public Trust Awards. The awards, open to all FTSE 100 and 250 companies, aim to celebrate the public commitment of companies to build public trust through their willingness to embrace greater corporate transparency. Building on this success and in accordance with best practice, Pilkington has been developing its Operating and Financial Review (OFR), the new format for annual reports, which will be mandatory by the time the Group s 2006 annual report is published. This year s report anticipates these changes in both its format and content. THE BOARD Bill Harrison will retire as a non-executive director after the annual general meeting in July. Bill has been a non-executive director since September 1998 and the board has benefited greatly from his experience in investment banking. I take this opportunity to thank him for his contribution and support. PROSPECTS In Building Products we expect some demand recovery, although in Europe surplus capacity and consequent weak pricing are expected to continue. We anticipate further cost pressure in commodity and energy prices, offset in part by the energy surcharges now operating successfully in North America and Europe. In Automotive, global vehicle build continues to grow and Pilkington Automotive is well placed to win new, and grow existing business. The Group continues to benefit from the reducing level of interest-bearing debt. Over the next year, our priorities are to maintain the momentum on costs established under Stage 1 of our three-stage strategy, to complete Stage 2, achieving a position of financial strength, and to begin the transition to Stage 3, through increased investment in profitable growth. Overall we expect to make further progress in 2005/2006.

6 Our company 4 The only global manufacturer concentrating solely on flat glass Founded in 1826, a listed company since 1970 Annual sales 2.7 billion Manufacturing operations in 24 countries Manufacturing base of 25 float glass lines (with interests in a further nine) 23,800 employees worldwide in two business lines Building Products (new build, refurbishment, interiors, furniture and white goods) Automotive Products (original equipment and aftermarket replacement) Sales in 130 countries and the widest global reach of any glassmaker MARKET AND COMPETITIVE ENVIRONMENT Pilkington is the world s second largest glass manufacturer. It is one of four global groups together producing 62 per cent of the world s high quality glass. With its joint ventures, associates and strategic partner, Pilkington is a leading supplier of glazing to the world s automotive industry. TECHNOLOGY Pilkington is a global leader in manufacturing excellence and innovation, notably in the areas of glass melting, glass-forming by the float process, on-line coating, fire-resistant glazing and complex shaping technology, especially for automotive windscreens and backlights. Pilkington s technical and engineering competencies make it the preferred partner for most new float glass capacity investments. Pilkington invests around 29 million a year in research and development. CUSTOMER BASE Upstream Building Products businesses supply a range of glass products to large processors and wholesalers, either directly or through sales agents, for use in exterior and interior applications. In downstream processing and merchanting, Pilkington supplies either direct to the market or through trade customers. Pilkington Automotive supplies Original Equipment (OE) to all of the world s major vehicle manufacturers, including General Motors, DaimlerChrysler, Ford, Toyota, VW, Renault/Nissan, Fiat, Honda, PSA and BMW, together with their subsidiary brands. In Automotive Glass Replacement (AGR), Pilkington has well developed aftermarket distribution and wholesale networks. GLOBAL SPREAD Around 59 per cent of the Group s revenues are generated in Europe, 27 per cent in North America, 7 per cent in South America and 7 per cent in the rest of the world. Pilkington has manufacturing operations in 24 countries and sales in 130, enabling it to take advantage of diversified sources of raw materials and to capitalise on the best local labour forces available. It also facilitates excellent responsiveness in terms of product range, quality and delivery times to its global customers in Automotive OE. Pilkington is either established or developing operations in emerging markets, with key targets identified as Russia, China, the Middle East and India. Europe Extensive operations throughout EU; established or growing in Poland, Czech Republic and Baltic states Russia Target emerging market. Float plant nearing completion in Moscow region for start-up in 2005 India Target emerging market. Feasibility studies in both float and automotive underway Japan Strategic partnership and technical cooperation with NSG North America Float/Automotive operations in US, Canada and Mexico. 35% interest in VVP Mexico China Important target emerging market. Operate floats with Shanghai Yaohua Pilkington. Management control of three Automotive plants South America Float/Automotive/glass processing in Brazil, Argentina and Chile Middle East Supplying float plant to Iran. Gulf region a target for growth Australasia Market leader in Float and Automotive operations

7 Pilkington is the world s second largest float glass group, with 15 per cent of world capacity (19 per cent including joint ventures and associates). Specialising exclusively in glass, Pilkington is one of only two companies in the Flat Glass* industry with a truly global presence. It is also one of only three glass groups with global automotive glazing capability and reach. 5 TWO STRONG BUSINESS LINES Sales % Building 2 47 % Automotive 3 4 % Other 1 BUILDING PRODUCTS Sales by geography % Europe 2 12 % North America 3 6 % South America 4 11 % Australasia 5 2 % Other 1 AUTOMOTIVE PRODUCTS Sales by geography % Europe 2 33 % North America 3 6 % South America 4 3 % Australasia 1 PROFIT BY BUSINESS LINE % Building Products 2 52 % Automotive Products 3 (10) % Group operations and technology management 3 TWO STRONG BUSINESS LINES Pilkington has market-leading positions in Building Products and in Automotive Original Equipment and Automotive Glass Replacement and is a major influence in most of the markets in which it operates. Approximately half the Group s revenues come from Building Products and Pilkington is a market leader in Europe, South America and Australasia for these products. Pilkington is also a leader in the Automotive market. Together with its joint ventures, associates and strategic partner, Pilkington holds a combined global OE market share estimated at around 24 per cent. Pilkington Automotive is a world leader in replacement glass. BUILDING PRODUCTS BUILDING PRODUCTS IS PILKINGTON S LARGEST BUSINESS LINE, WITH MANUFACTURING OPERATIONS IN 19 COUNTRIES. MANAGED ON A REGIONAL BASIS, ITS TWO LARGEST BUSINESSES ARE IN EUROPE AND NORTH AMERICA. THE BALANCE OF OPERATIONS IS IN SOUTH AMERICA AND AUSTRALASIA. Pilkington products help control energy usage, protect against fire, insulate against noise, provide safety and security, afford decoration and privacy, are used in all-glass façades and now include self-cleaning properties. Pilkington employs large-scale coating, laminating and silvering processes to make these products. Building Products manufactures and distributes float glass and manufactures and processes added value building glass products. Its main activities include: Float glass manufacturing; Rolled glass manufacturing; Semi-finished products: coated, laminated and silvered; Fire protection glazing; Processing: toughened, insulating glazing units, and merchanting; and Architectural glazing systems: e.g. Pilkington Planar. AUTOMOTIVE PRODUCTS PILKINGTON SERVES THE WORLDWIDE AUTOMOTIVE INDUSTRY AS PILKINGTON AUTOMOTIVE, UNDER A SINGLE GLOBAL MANAGEMENT TEAM. IT SUPPLIES ORIGINAL EQUIPMENT (OE) FOR NEW VEHICLES AND AUTOMOTIVE GLASS REPLACEMENT (AGR) FOR THE AFTERMARKET. ORIGINAL EQUIPMENT (OE) One of only three glass groups in the world with global automotive glazing capability and presence, Pilkington Automotive supplies all of the world s major vehicle manufacturers and the specialised transport sector. The Group operates a global key account network, matched to each vehicle manufacturer s own organisational requirements. AUTOMOTIVE GLASS REPLACEMENT (AGR) Pilkington has automotive glass aftermarket distribution and wholesale networks throughout Europe and North America, together with a smaller business in South America. Combined regional presence makes Pilkington the largest global operator in AGR distribution and wholesale. *Glass manufactured in flat sheets (float, sheet and rolled), which may be further processed. Excludes bottles, containers, fibreglass, rods and tubes.

8 Our industry 6 A 10 billion global industry at primary manufacturing level Pilkington float process is at the heart of the worldwide industry 75% of the world s demand for glass is in Europe, China and North America Pilkington is one of four glass groups producing 62% of the world s high quality glass Pilkington is one of only three glass groups supplying 75% of the world s automotive OE glazing Global glass demand outstrips GDP growth Volume growth as architects and car designers use increasingly larger glass areas Value growth in Building Products is driven by legislation and demand for enhanced functionality Value growth in Automotive is driven by model differentiation, increased complexity and functionality ROUTES TO MARKET Most of the world s float glass goes into buildings. Automotive applications account for around ten per cent. In Building Products, basic glass can undergo two or more stages of processing before being installed as original or replacement windows and glazing systems, or used as a component in furniture or white goods, such as cookers and refrigerators. Within Automotive, glass is used in original equipment for new cars, specialised transport applications, including buses, trucks, trains and ships, and also in the manufacture of replacement parts for the aftermarket. GLOBAL GLASS USAGE Building 90% New Buildings 40% Refurbishment 40% Interior 20% Automotive 10% Original Equipment 83% Replacement market 17% MARKET AND COMPETITIVE ENVIRONMENT The global market for flat glass in calendar year 2004 was approximately 36 million tonnes. At the level of primary manufacture this represents a value of around 10 billion. Of this tonnage, around 70 per cent is consumed in windows for buildings, ten per cent in glazing products for automotive applications and 20 per cent used in furniture and other interior applications. Europe, China and North America together account for 75 per cent of demand for glass. Europe is the most mature glass market and has the highest proportion of value-added products. Just four companies; Pilkington, Asahi, Saint-Gobain and Guardian, produce 62 per cent of the world s high quality float glass. Much of the world s lower quality float and sheet glass production is being replaced by high quality float. There are only three glass groups with global automotive glazing capability and presence. Pilkington, Asahi and Saint-Gobain, together with their respective associates and strategic partners, supply 75 per cent of the world s Original Equipment (OE) glazing requirements. INDUSTRY ECONOMICS A float plant typically costs 70 million to 100 million to build, depending on size, location and planned product complexity. It will operate non-stop for a campaign of between ten and 15 years, making around 6,000 kilometres of glass a year, before requiring refurbishment. A capacity utilisation rate of above 70 per cent is required for the plant to be profitable. In Automotive, a typical European automotive glazing plant, with capacity to fully glaze one million cars a year, could cost between 45 million and 65 million, depending upon the technology employed, the degree of automation and its location. WORLD HIGH QUALITY FLOAT GLASS CAPACITIES s tonnes Asahi Pilkington Guardian Saint-Gobain PPG Pilkington JVs & Associates Taiwan Glass Former Soviet Union TSCF NSG Hanglas Cardinal Keumkang Muliaglass Visteon Central Other float

9 Glass is a growth industry. Global demand for glass outstrips economic growth around the world. Today s architects and car designers are using larger surface areas of glass in their designs, increasingly with added functionality and complexity. 7 GROWTH IN GLASS Over the past 20 years, glass demand has grown more quickly than GDP. Over the long-term, glass demand is still growing at around 3.9 per cent per annum. Demand growth for glass is driven not only by economic growth, but also by legislation and regulations concerning safety, noise attenuation and the response to the growing need for energy conservation. Architects and car designers are using increasingly more glass in buildings and vehicles. VALUE GROWTH BUILDINGS DEMAND Energy saving (heating) Energy saving (cooling) Safety Security Fire protection Acoustic Self-cleaning GROWTH DRIVERS Energy saving legislation and building regulations; reduction of energy loss from buildings and energy labelling of windows Energy saving legislation, reduction of air-conditioning load in buildings. Preventing non air-conditioned buildings from overheating Increasing legislative requirement for safety glass in certain applications Requirement for transparency combined with security features Requirement for good light transmission and compliance with regulations on fire protection Increasing noise levels caused by traffic, aircraft etc progressively backed by legislation Reduction in use of detergents, safety at heights. Product range now extended to combine self-cleaning with additional features Index ( ) GLOBAL GLASS GROWTH vs. REAL GDP GROWTH Global glass demand growth: 3.9% p.a. Real GDP growth: 2.6% p.a VALUE GROWTH AUTOMOTIVE DEMAND Complexity Curvature & surface tolerance Solar control Security Glazing systems Integrated systems Acoustic GROWTH DRIVERS Designers see glazing as a crucial element in designs to differentiate vehicles Styling demands increase the complexity and depth of curves in vehicle glazing, making surface tolerances critical, e.g. for efficient windscreen wiper operation Larger glass areas require tinted and coated glazing to reduce solar heat build-up and air-conditioning load Crime and vandalism increase the need for enhanced security, provided by laminated side glazings Reduced time to market and lean manufacturing require modularised glazing, including trim and other fittings, in one unit Complex antenna arrays and electronics integrated into glazing Demand for increased vehicle comfort through noise reduction MOST FUTURE GROWTH OPPORTUNITIES WILL COME FROM EMERGING MARKETS WORLD LIGHT VEHICLE SALES GROWTH (Million Vehicles) WORLD FLAT GLASS MARKET (Million Tonnes) Developing Markets +15m 30 Developing Markets +21m 40 Developed Markets +3m Developed Markets +7m Source: Company estimates Source: Company estimates

10 GROUP CHIEF EXECUTIVE S REVIEW 8 Stuart Chambers Group Chief Executive The results for the past year demonstrate how Pilkington continues to benefit from our commitment to rigorous cost reduction and improvements in operational efficiency. This has helped to overcome the effects of variable trading conditions in our markets around the world. The results are a tribute to everyone working in the Group. STRATEGY Pilkington is following a clear three-stage strategy to improve the effectiveness of our existing operations, to produce net free cash from those operations to reduce debt and then to invest that cash in future profitable growth. Stage 1 never ends. It is just as important to reduce costs now, as we approach Stage 3, as it was during the Step Change programme. Pilkington operates in two of the most competitive markets in the world, float glass production and automotive component supply and we are well aware of the commitment and effort needed to stay ahead. The delivered cost of float glass is fundamental to our success and we intend to take every opportunity to reduce costs further. To consolidate our position as the lowest cost producer of float, to remain competitive in automotive and to deliver our target of a 15 per cent net cash return over the business cycle, we need to achieve continuous reduction in our cost base, in both Building Products and Automotive. Our Project 20 internal improvement programme aims to make Pilkington 20 per cent better. In Float and Automotive in particular, costs are a critical component of this. We continue to take every opportunity to improve operating efficiency and to drive down our overhead costs. With quality and safety as top priorities we aim to operate all our plants at the level of the best. We have made organisational changes in both Building Products and Automotive to capitalise on synergies in our supply chains. We are combating the current surge in energy and commodity costs by more effective purchasing, through hedging strategies and the introduction of energy surcharges. The rate of our transition from Stage 2 to Stage 3 will be determined by the progress we make in building our financial strength. Before spending cash on further growth opportunities, we first need to deliver the benefits from our investment in restructuring. Our key financial target is to cover our interest cost at least four times by operating profit before moving into Stage 3. We will continue to deliver strong cash flow performance, by improving supply chains to run the business effectively at ever-lower levels of stock, to improve cash collection so as to reduce working capital wherever possible and to channel most of our free cash flow after dividends into reducing our borrowings until our target levels are reached, which we aim to achieve in the coming financial year.

11 Over the next year, our priorities are to maintain momentum on our cost reduction programme, started in Stage 1 of our three-stage strategy, to complete Stage 2, reducing our debt and building financial strength, and to finalise plans for the transition to Stage 3 and profitable growth. 9 Work to prepare for Stage 3 has been in progress for some time. We have robust procedures in place to assess the viability and potential profitability of all growth prospects. We will consider organic growth and acquisition. Opportunities exist for profitable investment in our existing businesses, in new products and in emerging markets. China, Russia, India and the Middle East have been identified as priority areas for growth. We can minimise the risks of operating in new territories by working in joint ventures with local partners, where this is appropriate. Growth initiatives in anticipation of Stage 3 are already underway. The Pilkington-constructed fourth float line in Brazil for our South American joint venture is now in full production, achieving excellent results from the outset. A sound base has been established in China as a platform for future growth, with the three Automotive plants now fully under Pilkington management. The float line joint venture in Russia is on target to start production in summer 2005 and work has been underway to seed the market for the past two years. BUILDING PRODUCTS The objectives of our Building Products business are clear. We intend to retain our position as the technological leader in the Flat Glass industry, with continued investment designed to sustain a flow of new products and new processes. Safety and customer quality are at the top of our minds in all that we do. Pilkington has to be the lowest cost supplier to our customers. Sales of Pilkington Activ continue to progress well, driven by steady growth in product recognition. Increasingly, this growth is supported by the expanding range of Pilkington Activ derivatives, offering Pilkington Activ s unique self-cleaning properties in combination with solar control coatings, low-e energy-saving glass, laminated safety glass and noise-reduction laminates. Pilkington Eclipse Advantage reflective low-e glass; the world s first pyrolytic reflective low-emissivity product, continues to enjoy great success, with strong export sales around the world. Over 55,000 square metres of Pilkington Arctic Blue Eclipse Advantage, manufactured by Pilkington North America, was used in the construction of the striking Beijing Trade Center building in the Chinese capital. The European Union Directive Energy Performance of Buildings, to be incorporated into the laws of all 25 EU member states by January 2006, is likely to have a significant impact on legislation related to buildings throughout Europe. Its main provisions will require national building regulations to be reviewed at least once every five years. It will make compulsory the incorporation of energy-saving products in existing buildings undergoing major refurbishment, with a system of mandatory energy certification of any building when constructed, sold or rented to a new tenant. The result will be increased demand for energy-saving products such as low-emissivity and solar control glass. We have introduced a range of Pilkington Activ product derivatives, offering self-cleaning combined with solar control coatings, energy-saving glass, laminated safety glass and noise-reduction laminates. Building Product Europe s upstream business has achieved corporate ISO9001 certification. This is the first time that all the operations plants and support sites have been covered by a single management system and integrated certification scheme. The achievement comes a year after the launch of a continuous improvement integrated management system, which was designed to improve and standardise manufacturing, operational and administrative processes across Building Products Europe. AUTOMOTIVE PRODUCTS Pilkington has a substantial asset base dedicated to Automotive Products across Europe, North America, South America, Australia and China, and is well placed to meet the demands of the world s carmakers for innovative and reliable vehicle glazing systems. Pilkington Automotive operates as an integrated global organisation, serving the Original Equipment (OE) and Automotive Glass Replacement (AGR) markets throughout the world. Further integration has been achieved in the Pilkington Automotive global supply chain, bringing cost savings, optimisation of plant loading and improved service to both OE and AGR customers worldwide. Over the course of the year, we announced to customers in China the reorganisation of our three Chinese manufacturing plants, with a unified identity and organisation.

12 GROUP CHIEF EXECUTIVE S REVIEW CONTINUED 10 Pilkington Automotive has been successful in winning further new business in the highly competitive OE sector, with a record level of new model introduction activity in the OE business; 70 new models were launched in the past year. Pilkington has also made major inroads into the specialised transport business in North America, clinching contracts with the two largest Class A truck vehicle producers, Freightliner and PACCAR. Vehicle manufacturers continue to increase the number of body variants for each vehicle platform, with lead times being cut from the traditional three year period to as little as 18 months. These trends place additional pressure on component suppliers, underlining the need for right first time, every time new model introduction. An enterprise-wide supply chain system, SABRE, covering all automotive processes from new model introduction through manufacture to despatch and electronic self-billing, is now well established in the automotive business and the intention is to introduce it into all our Automotive plants worldwide over the coming year. Pilkington Automotive has been successful in winning further new business in the highly competitive Original Equipment sector, with a record 70 new models launched in the past year. Automotive styling trends have increased demand for advanced glass shapes, including windscreens wrapping around the sides of the vehicle and extending into the roof. Interest in large-area roof glazings is growing, along with moves towards colour tints such as blue glass to complement vehicle design. Use of laminated sidelights is growing, particularly in North America, where the acoustic properties of this enhanced glazing make it increasingly appealing. As a technological leader in the industry, Pilkington continues to be well positioned to take advantage of all these trends. TECHNOLOGY AND ENGINEERING Pilkington is a company founded on technological innovation in Flat Glass. Our role is to invest in sustaining this technology to create value for our shareholders. Over the year, we have successfully implemented a float line progressive repair strategy as an alternative to the traditional practice of plant shutdown for cold repair at the end of each campaign. This strategy has significantly reduced the capital investment required for float line repairs. It has also freed up part of our engineering resource to focus on new build opportunities as we move into the third stage of our Cash for Growth strategy. These include proposals for emerging markets in China, Central Asia and the Middle East. The new float line in Brazil is now in operation, following an excellent start-up, and is providing the Group with a very effective addition to our Latin American manufacturing base. The focus of the engineering organisation has switched to Russia, where construction of the new float line in Ramenskoye, near Moscow, has progressed very well despite the harsh winter conditions. The project is expected to start glass production in the second half of Equipment has been shipped to Iran during the past year for the new float line for Ghazvin Glass. Repair projects have started in Dandenong, Australia and Ottawa, USA and preparatory work has begun on further repairs in San Salvo, Italy and St Helens, UK. Pilkington Automotive has dedicated resources focused on modelling and simulation of processes and products. We have used virtual prototyping to develop the windscreen of the future. These panoramic windscreens are large, with sweeping wraps at the pillars. This has led to the expansion of the Polish plant to provide a dedicated windscreen line for complex windscreens to serve this growing market. The Automotive engineering team is completing commissioning of this important investment. INTELLECTUAL CAPITAL Pilkington is a global leader in manufacturing excellence and innovation, notably in the areas of glass melting, glass forming by the float process, on-line coating and complex shaping technology, especially for automotive windscreens and backlights. The Group invests around 29 million a year in research and development. Pilkington owns or controls approximately 2,000 patents and patent applications, predominantly in the fields of float glass production and processing and automotive glazing, and has access under licence to patents held by third parties. In addition, it has a cross licence agreement covering patents and know-how in the automotive field with Nippon Sheet Glass (NSG). Pilkington is also active in selective licensing of its patents and technology, in the areas of on-line coating, encapsulation (of automotive glazing) and rain sensors (for automotive glazing).

13 We operate in a good industry with positive prospects. Pilkington is well placed to capitalise on our technology and manufacturing strengths in both Building Products and Automotive. The long-term trends in our two business lines are positive. 11 LOOKING AHEAD Pilkington is the second largest producer of glass for buildings and vehicles in the world. We operate in a strong industry, with glass demand growing year on year. Although our Building Products and Automotive businesses have distinct drivers, there are many synergies, which we will continue to exploit as a single One Pilkington business. In Building Products there are signs that demand is recovering, though in Europe surplus capacity will continue in the short-term, with weak pricing. We expect to see considerable cost push in commodity and energy prices, but the energy surcharges operating in North America and Europe will help counter the effects. Increasing product complexity in Automotive will drive marketing opportunities. Global vehicle build continues to grow, particularly in Eastern Europe, China and Asia. Pilkington is a company founded on technological innovation in Flat Glass. Our role is to invest in sustaining this technology to create value for our shareholders. Low costs are fundamental to success in the Flat Glass industry. We will continue to seize every opportunity to reduce our cost base further. Cash generation remains a priority and we have plans to improve cash performance further by streamlining our supply chains to run our business effectively at ever-lower levels of stock, reducing working capital wherever possible. Over the next year, our priorities are to maintain momentum on our cost reduction programme, which began in Stage 1 of our three-stage strategy, to complete Stage 2, reducing our debt and building financial strength, and to finalise plans for the transition to Stage 3 and profitable growth.

14 Our strategy 1 Improve the effectiveness of existing operations ACTION Stage 1 never ends. It is as important to continue to reduce costs now, as we approach Stage 3, as it was during the Step Change programme. Our Project 20 internal improvement programme aims to make Pilkington 20 per cent better. In Float and Automotive in particular, costs are a critical component of this. 2 Generate cash to strengthen our finances ACTION Before spending cash on growth opportunities, we must first deliver the benefits from our investment in restructuring. Our target is to cover our interest cost by EBITA* at least 4 times before moving into Stage 3. * Earnings before interest, taxation, amortisation and exceptionals 3 Invest in profitable growth opportunities ACTION We will identify opportunities for profitable growth in our existing businesses, new products and emerging markets. We will consider organic growth and/or acquisition.

15 We are on a clear three-stage journey to ensure that we deliver value to our shareholders. Over the past seven years, we have made significant progress in reducing our costs and improving our competitiveness (Stage 1 of our three-stage journey). Most Pilkington manufacturing operations now operate at world-class levels and cost-reduction remains high on our agenda. Cash for Growth (Stage 2) has demonstrated that we can build on progress made over the past few years, by generating the cash needed to strengthen our financial position and to enable us to begin the transition to profitable growth (Stage 3). ACHIEVEMENTS TO DATE Overheads reduced significantly (by 312 million over the past seven years). Manufacturing performance radically improved. Most Pilkington businesses operate at world-class performance levels. NEXT STEPS Continue to take every opportunity to reduce costs further. Continue to drive down the overheads to sales ratio. Operate all our plants at the level of the best, with quality and safety as top priorities. RISKS Cost push in commodities and energy, countered by more effective purchasing, hedging strategy and introduction of energy surcharges. Increased competition from low labour-cost emerging markets, countered by our increased investment in these regions. ACHIEVEMENTS TO DATE Key performance indicators, management targets and incentives firmly aligned to cash generation. In 2005 we are able to report continuing strong cash inflow. Borrowings reduced by 348 million (38 per cent) in the three years since the launch of Stage 2. Interest now covered by EBITA more than four times. NEXT STEPS Continue to deliver strong cash flow performance. Improve supply chains to run the business effectively at ever-lower levels of stock. Improve debtor and creditor levels to reduce working capital wherever possible. Channel most of net free cash after dividends into reducing our debt until our target levels are reached, expected to be during 2005/2006. RISKS Failure to capitalise on synergies in supply chains, countered by applying more resources to this area. Concentration on cash could constrain the investment in ongoing businesses; nevertheless, investment needs are relatively low while developed markets are weak and we are following a focused capital allocation process. ACHIEVEMENTS TO DATE Pilkington-constructed fourth float line in Brazil for our South American joint venture is in full production. Sound base established in China as a platform for future growth. Automotive plants now fully under Pilkington management. Float line joint venture in Russia on target to start production in summer NEXT STEPS Key factor influencing the timing of our transition from Stage 2 to Stage 3 will be progress in building our financial strength. China, Russia, India and the Middle East have been identified as top four priority areas for growth. Robust systems implemented to assess viability of all growth opportunities. Groundwork laid for growth investments during Stage 2, structured to minimise cash outlay until the transition to Stage 3. RISKS Demand growth in mature markets slows in both building and automotive sectors, emphasising the need to grow in emerging markets. Risks of operating in new territories minimised through working with joint ventures and local partners where appropriate and by spreading our investments over several markets.

16 14 ROME, ITALY Dives in Misericordia Church Pilkington Optiwhite and laminated Pilkington Optilam Therm combine to offer high light transmission, together with optimal thermal performance, in this unique structure, designed by American architect, Richard Meier. BEIJING,CHINA Beijing Global Trade Center Over 55,000m 2 of Pilkington Arctic Blue Eclipse Advantage, manufactured by Pilkington North America, was used in this striking twin tower project in the Chinese capital. LITTLE ROCK, ARKANSAS, USA William Jefferson Clinton Presidential Center and Library The entire east wall of the building is formed of Pilkington Planar panels containing a uniquely processed laminate, which makes the glass transparent from one side and translucent from the other. Building Products Building Products sales, including joint ventures and associates, were 1,389 million, broadly in line with the previous year, at constant exchange rates. Operating profits were essentially unchanged at 144 million.

17 NEWARK, DELAWARE, USA Sanford School An improvement project at Sanford School includes the use of 448 windows and 6,493 square feet of glass, including Pilkington Activ self-cleaning glass in new construction and major renovation work. BONN, GERMANY Deutsche Post Building With the primary requirement for high light transmission, more than 47 different variations of Pilkington Optiwhite glass were used to striking effect in the construction of this flagship building. QUEENSLAND, AUSTRALIA Q1 Building The world s tallest residential building, due to open in 2005, will contain Pilkington clear and green toned glass, green laminates, ceramically decorated glass and double glazing using high specification Pilkington coated glass. 15 SOLAR CONTROL In warm weather, solar control products, such as Pilkington Suncool, dramatically reduce the effect of the sun s heat, minimising the need for air-conditioning. THERMAL INSULATION During cold weather, low-emissivity (low-e) products, including Pilkington Optitherm and Pilkington K Glass reflect heat back into buildings. FIRE PROTECTION Pilkington employs two types of technology to protect people and property against fire. Pilkington Pyroshield is a wired glass and Pilkington Pyrodur and Pilkington Pyrostop use a proprietary clear interlayer technology. NOISE CONTROL glass products that allow people to live and work in peace and quiet. Pilkington Optiphon L is a laminate using a special interlayer, which attenuates noise by 36 decibels. SAFETY glass that is used to reduce the risk of accident by impact, fracture or shattering. Pilkington toughened safety glass and Pilkington laminated safety glass provide a huge range of performance levels. SECURITY By using thicker and larger numbers of glass sheets in laminated form, Pilkington security glass offers even higher levels of protection from bullets and blasts. SELF-CLEANING GLASS Pilkington Activ self-cleaning glass is the latest example of technological innovation from Pilkington. Incorporating a proprietary dual-action coating on the glass, it virtually eliminates the need for external window cleaning. DECORATIVE GLASS The Pilkington Texture Glass range is continually updated to introduce new and exciting patterns which provide both decoration and privacy. GLASS SYSTEMS Pilkington Planar is a structural glazing system requiring no frame, allowing architects immense flexibility in the appearance of glass façades. SPECIAL APPLICATIONS Pilkington Optiwhite is an ultra-clear float glass with a very low iron content. Its neutral appearance makes it particularly appropriate for prestigious building projects and for use in furniture.

18 BUSINESS REVIEW 16 Building Products sales, including joint ventures and associates, were 1,389 million, broadly in line with the previous year at constant exchange rates. Operating profits were essentially unchanged at 144 million. Although sales volumes were at similar levels to the previous year in Europe, prices fell in the early part of the year. The reduction in prices was largely offset by internal cost savings and improved manufacturing efficiencies. In South America, profits improved by approximately 12 per cent. Global demand for float glass increased last year, with overall capacity utilisation of 87 per cent continuing its gradually improving trend from the low level reached in Most of the growth was in China, though South America improved and Australia held steady. While European demand picked up slightly, excess capacity remains. The North American commercial market continued to be weak last year, although there were clear signs of recovery as the year progressed. The Group s Building Products business remains a global market leader. Manufacturing performance is a critical element of this success and there is a continuing requirement both to ensure we implement best practice in every plant worldwide and to reduce the cost base in line with our objectives. To support this requirement, a worldwide manufacturing organisation for the business line has been created, which will include all the float and rolled plants worldwide, the central manufacturing improvement team and the Building Products technology group. EUROPE Building Products Europe is Pilkington s largest single business, representing 69 per cent of Pilkington s Building Products sales in Market conditions continue to be challenging, with industry capacity utilisation still low at about 82 per cent, following the market decline in 2001 and The competitive environment has led to price erosion, and prices have reached historical lows. At least 18 months of further volume increases closer to the long-term trend will be required to soak up excess capacity before firmer pricing can be expected. In response, significant improvements in manufacturing performance were made during the year, further reducing costs. The restructuring of the European business approximately one year ago has simplified administration and brought further cost savings. Additional restructuring of the downstream network resulted in the sale or closure of a number of branches in Austria. The significant cost push in energy and raw materials was partly offset by the successful introduction of an energy surcharge. The net effect of all these factors has been a modest decline in sales and operating profits. Production of the Group s high value-added clear fire protection range, the marketleading Pilkington Pyrostop, again increased in Germany to meet continuing growth in demand for this product. In the year, Pilkington Pyrostop was launched in Australia and a cutting station established to provide best service to the market. In the UK, an improved version of Pilkington Pyrodur Plus has been well received, allowing the business to grow sales at a faster rate. Sales of Pilkington Activ continue to progress well, driven by steady growth in product recognition. Increasingly, this growth is supported by the expanding range of Pilkington Activ derivatives, offering Pilkington Activ s unique self-cleaning properties in combination with solar control coatings, low-e energy-saving glass, laminated safety glass and noise-reduction laminates. UK sales of low-emissivity Pilkington K Glass were once again strong, following the upgrade in UK building regulations. The Group s first float glass plant in Russia, in the Ramenskoye district of the Moscow region, is at an advanced stage of construction. Work has also begun on a new insulating glass unit manufacturing facility in Szezchin, Poland. NORTH AMERICA North America represented 12 per cent of Pilkington s Building Products business in 2005, mainly selling to the commercial market, where market demand has been weak for the last few years but is now Pilkington products help keep buildings warm in winter, cool in summer, safe, secure and with reduced noise penetration. Pilkington glass can stunningly transform the interior and exterior of buildings, provide protection from fire and smoke, and now even clean itself! ECLIPSE ADVANTAGE WORLDWIDE SUCCESS Pilkington Eclipse Advantage is an innovative low-e glass, combining solar and thermal control with high visible-light transmission. It offers subtle reflectivity, glare control and a crisp, consistent colour that only a glass coated online can provide. A best-seller in North America and elsewhere, Pilkington Eclipse Advantage is exported for use in landmark buildings around the world.