ANNUAL REVIEW Making glass for the world s buildings and vehicles

Transcription

1 ANNUAL REVIEW 2004 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 23,900 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 business 6 Group chief executive s review 10 Our strategy 12 Building Products 14 Review of operations: Building Products 16 Automotive Products 18 Review of operations: Automotive Products 20 Finance director s review 24 Corporate social responsibility 30 Board of directors 31 Summary directors report 31 Summary remuneration report 36 Summary financial statement 41 Independent auditors statement to the shareholders of Pilkington plc 42 Shareholder information 44 Shareholder contacts

3 Financial highlights Operating profit from Group businesses up to 179 million from 175 million Profit before goodwill amortisation, exceptional items and taxation on a like-for-like basis up to 151 million from 145 million m m Profit before taxation Add : Exceptional items 7 4 Amortisation of goodwill 8 9 Less : Interest cost of refinanced preference shares (8) Earnings per share before amortisation of goodwill and exceptional items up to 7.4 pence from 6.5 pence (plus 14 per cent); basic earnings per share up to 6.2 pence from 5.4 pence Free cash flow (before dividends, acquisitions and disposals) up to 207 million from 135 million; a record cash performance Net debt reduced by nearly one quarter in the year, from 861 million to 664 million Final dividend 3.25 pence, maintaining 5.0 pence in total for the full year Turnover (including share of joint ventures and associates) Operating profit (including share of joint ventures and associates) Profit before goodwill amortisation, exceptional items and tax Cash flow from operations Cash flow before dividends, use of liquid resources and financing m m m m m ,820 2,805 2,754 2, Non-statutory disclosures are reconciled to the statutory disclosures in note 2 to the Summary Financial Statement on page 39. Pilkington plc annual review

4 Chairman s statement Sir Nigel Rudd Chairman I am pleased to be able to report another set of strong results from Pilkington. As anticipated, challenging conditions continue to prevail in most of the markets in which the Group operates. Despite this, Group sales held up well and the Group s operating profit excluding joint ventures and associates rose from 175 million to 179 million, with the strong profit performance in Automotive offsetting the reduction in Building Products. Our share of profits in joint ventures and associates, affected by currency weakness in Mexico, fell from 42 million to 33 million. Continuing focus on cash generation enabled Pilkington to generate its highest ever cash inflow before dividends, management of liquid resources and financing of 240 million, and to reduce Group borrowings by 23 per cent over the year, to 664 million. Taking into account the preference shares redeemed last year, this is the lowest level of Group borrowings recorded since These results again featured a strong performance in our Automotive business, where organisational and operational performance improvements have helped offset price pressures. Building Products results in Europe were affected by generalised price weakness, though outside Europe Building Products results continued to improve. Results were further underpinned by the transformation in manufacturing and operational efficiency achieved over recent years in both businesses. The sale of Pilkington Aerospace has concentrated management s focus further on the core Building Products and Automotive businesses. A unified Building Products Europe business, encompassing both upstream and downstream operations, has been established. The reorganisation of the Automotive business has been completed with the creation of a single global organisation serving both the Original Equipment (OE) and Automotive Glass Replacement (AGR) sectors. The Step Change programme in North America, launched three years ago to bring our businesses there up to the levels of the rest of the Group, has now been completed, with the predicted annual benefits achieved. Nevertheless, Pilkington is determined to maintain its competitive edge and programmes have been launched over the past year to ensure that the Group stays ahead through further reductions in overhead costs and improved efficiency. FINANCIAL RESULTS Turnover from continuing operations, including joint ventures and associates, was unchanged at 2.8 billion. Operating profit from Group businesses was 4 million ahead of last year at 179 million, though profits from joint ventures and associates declined, mainly in Brazil and Mexico, from 42 million to 33 million. As a result, overall operating profit at 212 million was down two per cent on the 217 million in Profit before goodwill amortisation, exceptional items and taxation of 151 million was impacted by the borrowing costs assumed following the decision to refinance the outstanding preference shares in March 2003, but on a like-for-like basis rose by four per cent over the 145 million in After deducting goodwill amortisation of 8 million ( million) and exceptional losses arising from the sale and termination of operations of 7 million ( million), profit before tax was 136 million ( million). Earnings and dividends Earnings per share before exceptional items and amortisation of goodwill increased from 6.5 pence to 7.4 pence, up 14 per cent. Basic earnings per share increased from 5.4 pence to 6.2 pence, up 15 per cent. Compared to 2003, attributable earnings rose due to lower net interest costs, tax charges and minority interests, despite the reduced profit contribution from joint ventures and associates. The board is recommending a final dividend of 3.25 pence per share, bringing the total for the year to 5.0 pence per share, the same as last year. The dividend is covered nearly three times by free cash flow. Subject to the approval of shareholders at the annual general meeting, the final dividend will be paid on 30th July 2004 to shareholders on the register at 11th June Cash flow and borrowings Operating cash flow amounted to 377 million ( million). Cash flow before dividends, management of liquid resources and financing increased from 138 million to 240 million, up 74 per cent. After payment of 54 million for dividends, net cash flow before financing more than doubled from 80 million to 186 million. This clearly demonstrates Pilkington s continuing achievements against a key strategic objective, enabling the Group to make further significant reductions in its borrowings. 2 Pilkington plc annual review 2004

5 This is a strong set of results that shows Pilkington achieving management s objectives. Our focus on keeping down costs has enabled Pilkington to report substantially maintained profits despite challenging conditions in some of our biggest markets. Operational and manufacturing efficiency improvements achieved over the past few years have resulted in a record cash performance our prime objective for this stage of our strategy. Group borrowings were reduced by 23 per cent over the year. Pilkington remains on track with its strategy and is delivering on its promises. Net borrowings at 31st March 2004 were 664 million, down by 197 million from 861 million at 31st March The reduction in borrowings over the last two years was 256 million, down 28 per cent, taking into account the Pilkington Channel Islands Limited s preference shares redeemed in STRATEGY Pilkington is implementing a clear three-stage strategy, Cash for Growth, the stages of which are: First improve the operational fitness of the businesses; Second produce net free cash from operations, initially to reduce debt; and then Third invest surplus cash in future profitable growth. Over the past six years, radical improvements have been made in manufacturing performance, with significant reductions in overheads across the business. Management attention remains focused on achieving further internal economies and on the generation of net free cash. Planning is already well advanced on the third stage of the strategy, investment in the growth of the business. Such investment will be in existing operations as well as in new markets and Pilkington has already established a presence in both Russia and China, investing so as to limit risk and minimise early cash expenditure. THE BOARD As anticipated in my statement last year, Dr. Hans-Peter Keitel and Andrew Robb retired as directors at the conclusion of the annual general meeting on 28th July Christine Morin-Postel joined the board as a non-executive director on 1st August 2003 and we are benefiting from her knowledge of international markets and from her experience in general management and human resources. COMPANY SECRETARY John McKenna will retire as the company secretary on 31st July 2004 after nearly 39 years with Pilkington. John joined the Group in 1965 and, after undertaking a number of roles in the Group Legal Department, became the company secretary on 1st September John has made a valuable contribution to the work of the Group over many years and I wish him a long and happy retirement. I am pleased to announce that Sheila Lennon, who is currently the assistant company secretary, has been appointed to succeed John as the company secretary with effect from 1st August EMPLOYEES Over the past ten years, the number of employees in the Pilkington Group has been reduced by around 30 per cent. Pilkington now employs 23,900 people, between them speaking 17 different languages and manufacturing in 24 countries. With fewer and more empowered employees, the need for excellent communications has never been higher. Pilkington already has in place a robust internal communication system, including an award-winning internal newspaper, Pilkington Focus (published in all local languages), and a Group intranet operational around the world. Over the past year, a major communications programme, led by the group chief executive, has ensured that every employee understands the Group s strategy and the part he or she can play in its implementation. Further improvements are planned for the coming year to ensure that the same rigour is applied to employee communications as to all our procedures. 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. Pilkington plc annual review

6 Our business Glass is a growth industry. Global demand for glass consistently outstrips economic growth around the world. The past 50 years have seen a significant increase in the proportion of glass used in the world s buildings and vehicles. At the heart of the world s glass industry is the Float Glass process developed by Pilkington in 1952 and now the world standard for high quality glass production. Today s architects and car designers are using larger surface areas of glass in their designs, increasingly with added functionality and complexity. TWO STRONG BUSINESS LINES Sales 2004 SALES BY GEOGRAPHY Building Products 59% EUROPE 22% NORTH AMERICA 8% SOUTH AMERICA 11% AUSTRALASIA BUILDING 53% AUTOMOTIVE 45% Automotive Products 53% EUROPE 39% NORTH AMERICA OTHER 2% 5% SOUTH AMERICA 3% AUSTRALASIA TWO STRONG BUSINESS LINES Pilkington and its joint ventures and associates have the widest geographic reach of any glassmaker. Over half our sales are in Europe, approximately a third are in North America, and the rest primarily in South America and Australasia. BUILDING PRODUCTS This business encompasses Pilkington s activity in manufacturing float glass and other processed building glass products. Principal areas of operation are Europe, North America, South America and Australasia. The business has manufacturing operations in 18 countries. Pilkington building products control energy usage, protect against fire, insulate against noise, provide safety and security, afford decoration and privacy, self-cleanse and provide all-glass facades. AUTOMOTIVE PRODUCTS Pilkington Automotive operates as a single global organisation serving the Original Equipment (OE) and Aftermarket (AGR) sectors. The business has manufacturing operations in 17 countries. Principal operations are in Europe, North America, South America, Australia and China. The business supplies all of the world s leading vehicle manufacturers. In 2003, around one in four light vehicles built in the world contained Pilkington glass. 4 Pilkington plc annual review 2004

7 FLOAT MANUFACTURER BUILDING PRODUCTS AUTOMOTIVE PRODUCTS NEW BUILDINGS REFURBISHMENT INTERIOR ORIGINAL EQUIPMENT (OE) AFTERMARKET (AGR) INSTALLER/ DEALER OE MANUFACTURER/ WHOLESALER/ FITTER CONSUMER ROUTES TO MARKET Most Pilkington products are made from Float Glass. In Building Products, basic glass can undergo two or more stages of processing before being installed as original or replacement windows or glazing systems, or used as a component in furniture or white goods, such as cookers and refrigerators. Within Automotive, we supply glass used in original equipment for new vehicles to all of the world s leading carmakers and also manufacture and distribute replacement parts for the aftermarket throughout the world. WORLD FLOAT GLASS CAPACITY Float glass capacity of the world s leading float glass manufacturers in ,000 DIVISION ONE DIVISION TWO GLOBAL DEMAND Growth in global glass demand has outpaced GDP growth since ,000 GLOBAL GLASS DEMAND GROWTH : 3.6% p.a ,000 Index (1991 = 100) 100 REAL GDP GROWTH : 2.5% p.a s tonnes ASAHI PILKINGTON GUARDIAN SAINT-GOBAIN PPG TAIWAN GLASS PILKINGTON AFFILIATES TSCF HANKUK FORMER SOVIET UNION NSG CARDINAL KEUMKANG MULIAGLASS VISTEON CENTRAL EUROGLAS CHINA OTHER Calendar year A LEADER IN THE WORLD S GLASS INDUSTRY 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. With its associates and strategic partner NSG, Pilkington is the world s number one supplier of glass and glazing systems to the world s automotive industry. Around one in four light vehicles in the world built in 2003 contained Pilkington glass. Pilkington is the world leader in Automotive Glass Replacement (AGR). GLOBAL DEMAND FOR FLAT GLASS Glass growth is fuelled by the demand for larger areas of building and automotive glass, which in turn are driven by economic growth. Whilst 2004 is expected to offer a modest growth in basic volume, over the long-term, glass demand is still growing at over 3.6 per cent annually, outstripping average Gross Domestic Product (GDP) growth worldwide. Pilkington plc annual review

8 Group chief executive s review Stuart Chambers Group Chief Executive The results for the past year demonstrate that Pilkington remains on track with its strategy and is delivering on its promises. We have defined and are implementing a clear three-stage strategy Cash for Growth to improve the operational fitness of our businesses, to produce net free cash from our operations to reduce debt and then to invest that cash in future profitable growth. STRATEGY Stage one of Cash for Growth, launched in 1997, concentrated on improving the effectiveness of our existing operations, building one Pilkington with one agenda, standard operating procedures and a clear sense of purpose in all our operations. We also set out to achieve a step change in our profitability and competitiveness. The objective was, and remains, to be the best in the world at making and selling flat glass. This Step Change has taken some six years to achieve, a huge amount of effort by everyone in Pilkington and a significant financial investment. This Step Change stage has largely been completed. We have significantly reduced our overheads and radically improved manufacturing performance, with most Pilkington businesses around the world now operating at world-class levels. Our objective now is to bring all our plants up to excellent performance levels, with safety and quality underpinning everything we do. We operate in two of the most competitive markets in the world and are well aware that we need to redouble our efforts to stay ahead. Low costs remain fundamental to success in the Flat Glass industry and we intend to identify and take every opportunity to reduce costs further. To secure our position as lowest cost producer and to deliver our target of a 14 per cent net cash return over the business cycle, we need to achieve a further step change in our cost base in both Building Products and Automotive. For this reason, we have over the past year launched a companywide initiative known internally as Project 20. This is intended to ensure that in three years time we are 20 per cent better than we are today, staying ahead of our competitors and able to compete for business anywhere in the world. For Pilkington, better is primarily (but not exclusively) about reducing costs, wherever and whenever we can. Project 20 therefore targets a reduction in our cost base over the next three years. We are achieving this through a re-examination of every activity in our supply chain, benchmarking our best operations and transferring skills, as well as identifying and eradicating waste throughout the Group. The generation of net cash is key to both stages two and three of our Cash for Growth strategy. In stage two, which we entered in April 2002, our clear priority has been to generate a net surplus of cash from our newly efficient operations around the world and use the cash generated to reduce our borrowings. We are making excellent progress and we fully expect to complete stage two by around the middle of 2005, by which time the financial position of the Group will be significantly strengthened. At this point we will be entering stage three, when we will invest in the growth of our business. We will invest in growing existing operations as well as in growing in new markets, such as Russia and China. In both of these markets, we have already established a presence, investing in a manner that limits our risks and minimises cash outflow. We announced last September the formation, with Emerging Markets Partnership, of a 50:50 joint venture to construct and operate a float glass plant in the Moscow region of Russia. The plant, to be built and operated by Pilkington, will have a sales capacity of approximately 240,000 tonnes per annum and is planned to come on stream in Construction work is underway on the plant, which represents a first step in establishing a growth opportunity for Pilkington in Russia, an important expanding market for flat glass. Pilkington has been active in China since 1983, and we now have extensive sales and manufacturing operations, with a significant interest in the float manufacturing company Shanghai Yaohua Pilkington and stakes in four automotive glazing plants. Pilkington Automotive is already the largest foreign supplier of automotive glass to the Chinese car industry and we intend to increase our investment in this important and fast-growing market. 6 Pilkington plc annual review 2004

9 In Building Products, our most important new product, Pilkington Activ dual-action self-cleaning glass, is already having an impact in the market worldwide. BUILDING PRODUCTS The objectives of our Building Products business are clear. Whilst keeping safety and customer quality at the top of our minds in all that we do and continuously improving both, we must be the lowest cost supplier to our customers. 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. Our most important new product, Pilkington Activ TM dual-action self-cleaning glass, is already having an impact in the market worldwide. The customer base for Pilkington Activ TM has increased steadily throughout the year. The lead-time for construction projects is such that a growing number of landmark buildings fitted with Pilkington Activ TM are only now nearing completion. These include the recently opened headquarters of the insurance company Groupama in Lyon, France, in which 5,000 square metres of Pilkington Activ TM have been installed and the Britomart building in Auckland, New Zealand, glazed throughout with the product. The Pilkington Activ Suncool TM range, which we will continue to widen during the coming year, offers the dual benefits of self-cleaning and solar control in one product. Over the past year, we have augmented the Pilkington Suncool TM product range to extend colour choice and enhance performance in this important specification-led and added-value sector. For the refurbishment of the 12 storey Eurohaus office complex in Frankfurt am Main, Germany, the architects specified more than 12,000 square metres of Pilkington Suncool TM 50/30 Silver. The glass has been used for all the façades and harmonising spandrels. In North America, we have launched Pilkington Eclipse Advantage TM reflective low-e glass; the world s first pyrolitic reflective low-emissivity product, available on grey, bronze, bluegreen, EverGreen, Arctic Blue, and clear substrates. The product range, which replaces the previous Eclipse Reflective line, meets modern architectural demands for high visible light transmittance, low exterior reflectance, good thermal performance and excellent solar control properties. Sales of this exciting product have been strong since its launch. The results for the past year demonstrate that Pilkington remains on track with its strategy and is delivering on its promises. We are implementing a clear three-stage strategy Cash for Growth to improve the operational fitness of our businesses, to produce net free cash from our operations to reduce debt and then to invest that cash in future profitable growth. Pilkington plc annual review

10 Group chief executive s review continued In Automotive, Pilkington has a substantial dedicated asset base 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. AUTOMOTIVE PRODUCTS Our Automotive business now operates as a single global business, encompassing all our Original Equipment (OE) and Automotive Glass Replacement (AGR) operations throughout the world. We have created an integrated business line structure that is delivering improved customer service, greater competitiveness, a stronger and sustainable business model and substantial cash flow improvement. The benefits of these changes are now showing through clearly in the results from the business. 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. Reduced time to market for new vehicle programmes and growth in demand for glazing systems continue to be major drivers in this part of the business. We are seeing lead-times for new vehicles, from first design to full production, being cut by as much as half, to 18 months or even less, compared with the traditional development period of around three years. Vehicle manufacturers are also progressively introducing niche models based on common platforms. This presents challenges for the glass supplier, as the glazing requirements are typically different for each variant. Continuous improvement in simulation and virtual prototyping has allowed us to meet shortening deadlines and we have expanded our prototyping facilities in Europe and North America to improve development and delivery of glazing system assemblies. Interest is growing in full area sunroofs, requiring a combination of shaping competence, tight tolerance control, solar control and glazing system integration capability. We have seen further evidence of laminated sidelight growth, particularly in North America. Europe has led the styling trends for advanced glass shapes, including panoramic windscreens and large area roof glazings, as well as moves towards colour tints such as blue glass to complement vehicle design. Pilkington continues to be well positioned to take advantage of all these trends. The past year has seen the highest concentration ever of new model introduction activity in our 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. Just over a year ago we launched SABRE, an enterprise-wide supply chain system covering all automotive processes from new model introduction through manufacture to despatch and electronic self-billing. SABRE has so far been implemented in the UK, Belgium, France, Spain and Poland, and the intention is to introduce it into all our Automotive plants worldwide as quickly as possible. TECHNOLOGY AND ENGINEERING We continue to invest in state-of-the-art facilities to support our ongoing new product and process R&D programme. We have recently completed the installation of a large-scale magnetron sputter coater at our European Technical Centre at Lathom in the UK. This equipment will support coated product and process development for both Building and Automotive Products. Also nearing completion at Lathom is a three-year investment programme to equip the Group with a full-scale automotive glass processing facility to enhance our capabilities in new product and new model development. The investment will both accelerate development programmes and remove the need to tie up manufacturing capacity for these activities. Both of these initiatives represent multi-million pound enhancements of our R&D facilities. Construction is almost complete on our latest float line at Barra Velha, Brazil, a joint venture with Saint-Gobain, to meet increasing demands for glass in the south of the country. The line is due to be commissioned in July 2004 and as Brazil nears completion, foundation work has begun on the joint venture line at Ramenskoye, near Moscow, due to start production in the second half of Work is also underway on a new Iranian float line for Ghazvin Glass, planned to start up in Pilkington plc annual review 2004

11 Low costs remain fundamental to success in the Flat Glass industry. We will continue to identify and grasp every opportunity to reduce our cost base further. Ensuring the business makes the most efficient use of its available cash requires that the shutdown, repair and return to capacity of our existing float lines is carried out quickly and on budget. This is reflected in an increasingly busy re-build schedule for our engineering function. In Germany, we recently re-started a float line in Gladbeck and a rolled facility at Schmelz after refit and modernisation. Preparatory work is now underway for repairs to two further lines, one in Dandenong, Australia and one in Europe, with both programmes due to begin in 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. Low costs remain fundamental to success in the Flat Glass industry. We will continue to identify and grasp 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. The priority going forward is to channel most of our net free cash after dividends into reducing our debt until our target levels are reached, which we expect to be early in 2005/2006. At that point we will move into stage three of our Cash for Growth strategy, when the emphasis will shift to profitable growth through our existing businesses, emerging markets and, where appropriate, acquisition. Work is already well underway to identify and prioritise our growth options and to prepare for implementation from mid Pilkington plc annual review

12 Our strategy We have a clear three-stage strategy to ensure that we deliver value to our shareholders. Over the past six 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 are now at, or approaching, world-class levels. Cash for Growth will ensure that we build on the progress we have made over the past few years by generating the cash needed to strengthen our financial position (Stage 2) and to fund profitable growth (Stage 3). STAGE FOCUS ACTION 1997 Improve the effectiveness of existing operations ( Step Change ) Although Stage 1 is largely complete in Step Change terms, we intend to continue to seize every opportunity to reduce our costs. An internal improvement programme, Project 20, aims to make Pilkington 20 per cent better, reducing our cost base through a re-examination of all our processes, internal benchmarking and waste elimination. mid 2002 Generate cash to strengthen our finances Before spending cash we generate on further growth opportunities, we must first deliver the benefits from our investment in restructuring. This means reducing the borrowings which financed the Step Change programme. mid 2005 Invest in profitable growth opportunities We will identify opportunities for profitable growth in our existing businesses, new products and emerging markets. We will consider organic growth and/or acquisition. 10 Pilkington plc annual review 2004

13 Pilkington is at a crucial stage in its three-stage journey to become a truly top performing company, delivering value to our shareholders ACHIEVEMENTS TO DATE NEXT STEPS Overheads reduced significantly (by 275 million over the past six years). Manufacturing performance radically improved. Most Pilkington businesses operate at world-class performance levels. Final stage of the Step Change programme in North America completed, improving profits in both businesses. Continue to take every opportunity to reduce costs further. Continue to drive down overheads to sales ratio. Operate all our plants at world-class performance levels, with Quality and Safety as top priorities. Key performance indicators, management targets and incentives firmly aligned to cash generation. In 2004 we are able to report continuing strong cash inflow, the highest since the early 1990s. Borrowings reduced so far by 256 million (28 per cent) in the two years since the launch of Stage 2. Continue to deliver strong cash flow performance. Improve supply chains to run the business effectively at ever-lower levels of stock. Improve debtors and creditors to reduce working capital wherever possible. Channel most of net free cash after dividends into reducing our debt until target levels are reached, expected to be during 2005/2006. Fourth float line under construction in Brazil for our South American joint venture. On stream in 2004/2005. Sound base established in China as a platform for future growth. Pilkington is already the leading foreign automotive glazing supplier in China. Float line joint venture in Russia is due to come on stream in 2005/2006. The generation of cash remains top priority. Meanwhile we will prioritise our growth options. We will lay the groundwork for certain growth investments during Stage 2, but these will be structured to minimise cash outlay until we are at Stage 3. Pilkington plc annual review

14 Building Products

15 Building Products sales, including joint ventures and associates, were 1,448 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. ENERGY MANAGEMENT Coated and tinted products and insulating glazing units are used to control the flow of energy into and out of a building. During cold weather, low emissivity (low-e) products reflect heat back into the building. In warm weather, solar control products dramatically reduce the effect of the sun s heat, minimising the need for air-conditioning. 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. 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. 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. 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. 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. Pilkington plc annual review

16 Review of operations: Building Products BOOSTING RESEARCH A new 3.3 million magnetron sputter-coating machine has recently been installed in the Group s European Technical Centre at Lathom, Lancashire. The machine uses production scale technology and will be used for developing new added-value products, particularly high-performance solar-control glazing and to aid research into the technology of bending coated products. 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 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. Improved quality and service remain key drivers in the business strategy and all processing and merchanting customers in Europe can now place orders online. 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 mainly 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 14 Pilkington plc annual review 2004

17 A NOVEL APPLICATION FOR PILKINGTON ACTIV To protect the famous Nottbeck fountain in the northern city of Tampere during the harsh Finnish winter, the city council this year arranged for it to be completely covered in winter with a striking 4.5 metre high curved glass cover. The high technology glass structure consists of an inner layer of 6mm toughened safety glass, laminated to an outer layer of 6mm Pilkington Activ self-cleaning glass, which is now available in all major markets worldwide. STRATEGIC GROWTH OPPORTUNITIES Construction is almost complete on the Group s latest float plant at Barra Velha, Brazil. A joint venture with Saint-Gobain, the line has been built to meet the increasing demands for glass in the south of the country. Foundation work has also begun on a joint venture float line at Ramenskoye, near Moscow, which is due to start production in the second half of Plans for a float line in Iran in 2006 are also underway. 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 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 represent nine per cent of the Group s Building Products sales, continuing strength in residential housing markets has sustained glass demand. Pilkington s valueadded 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 refocused 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 in China 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. Pilkington plc annual review

18 Automotive Products Automotive Products sales, including joint ventures and associates, were 1,250 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 ongoing drive for improved operating efficiencies, reduced costs and higher profitability. 16

19 LAMINATED SIDELIGHTS Increased comfort: high frequency noise reduction, ultraviolet protection, solar control improvement and reduced direct solar radiation Security: reduced theft from cars, personal security and increased protection from intrusion Safety: less risk of full or partial ejection and increased resistance to object penetration. SOLAR CONTROL GLAZINGS Glass that reduces the effects of solar heat build-up inside the car. Improves passenger comfort Reduces air conditioning load, thereby increasing fuel economy Reduces ultraviolet transmissions, increasing the life of interior materials. GLASS SUNROOFS Designers are increasingly specifying large area glass roofs for cars. The parts, termed Panorama roofs, are two or three times the size of traditional sunroofs and increase the feeling of space and light within the vehicle. WATER MANAGEMENT GLAZING Heated glass systems that remove condensation from internal glass surfaces and ice from external surfaces. Hydrophobic coating on the glass that rapidly clears rainwater from the car windows, increasing passenger visibility. GLASS SHAPING Glass is bent into shape for vehicle windows. After heating, sag-bending and press-bending allow the manufacture of complex shapes free from wrinkles and other optical defects. GLAZING SYSTEMS Any components or features added after basic manufacturing to increase value to the customers. Examples include door cassettes or door modules. By encapsulation the window frame or gasket is moulded directly onto the glass in a closed mould process. RAIN SENSORS Pilkington has developed a patented sensor, using infrared rays to detect moisture on the windshield. It then automatically activates the windshield wipers at the right speed for the intensity of rain.

20 Review of operations: Automotive Products PROMOTING AUTOMOTIVE DESIGN Pilkington Automotive is involved in the design of vehicle glazing at an early stage in the development process. To encourage young vehicle designers, Pilkington has for the past 16 years sponsored the Royal College of Art Vehicle Design Awards. In 2003, student Mohammed Arthur Ali won the Best Design Interpretation category with a revolutionary Mountain Bike Car which was described by one of the judges as a niche vehicle with attitude. 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. This presents challenges for the glazing supplier as, although car makers will interchange elements from the base models, the glass is different in each variant. In addition, lead times for vehicles are being cut by as much as half, to 18 months or even less, compared with a traditional development period of around three years. For Automotive to become a more effective, more capable and committed business, excellence in communication has been identified as a critical foundation for the achievement of continuing improvement. Therefore, improvements in internal communications will be a priority over the coming year. The business continues to develop, improve and expand its single global quality management system. This has now been implemented in all the OE operations in Europe, North America and South America, enabling these operations to achieve certification to the ISO/UT 16949:2002 quality standard. Work has begun on implementing the system in all the OE operations in Australia and China. 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 18 Pilkington plc annual review 2004

21 SHORTENING DEVELOPMENT TIMES IN OE Pilkington is supplying the entire glazing for the new Chrysler Crossfire sports coupe which was launched in Autumn 2003, followed by the cabriolet in Spring The fast development time for the model is typical of reduced time to market for new vehicle programmes. Lead times, from first design to full production, are being cut by as much as half, to 18 months or even less, compared with the traditional development period of around three years. Pilkington is involved in the design process from the start. SPEEDING SERVICE IN THE AFTERMARKET Improved customer service and lower operating costs are an ongoing objective within the Group s AGR operations. A comprehensive bar-coding system throughout the AGR business means that data storage is now faster and more accurate, costs are lower, mistakes are minimised, and managing a large, complex inventory is much easier. Approximately 11 per cent of Pilkington s annual total sales come from the AGR business. 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-onyear 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 pressure 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 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. Pilkington plc annual review

22 Finance director s review Iain Lough Finance Director RESULTS FOR THE YEAR Turnover Despite challenging markets in both Building and Automotive Products, Pilkington sales were at a similar level to last year m m Turnover Group companies 2,440 2,414 Joint ventures and associates Total turnover 2,751 2,754 Operating profit Group companies Joint ventures and associates Total operating profit Exceptional items (7) (4) Net interest payable (69) (73) Profit before taxation Taxation (47) (49) Profit after taxation Minority interests (11) (23) Profit attributable to shareholders Dividends (63) (63) Retained profit of the Group 15 5 EPS (excluding exceptional items) 6.7p 5.8p EPS (including exceptional items) 6.2p 5.4p Profit before taxation, exceptional items and amortisation of goodwill Operating profit Operating profit in Group businesses of 179 million for 2004 increased two per cent on the previous year. In Building Products, challenging trading conditions in all major markets except the UK and Australia, together with another year of weak demand in US commercial construction, were the main factors behind the drop in operating profit from 137 million to 120 million. However, in Automotive, profits increased from 67 million to 86 million, an improvement of 28 per cent. This is due to success with new model introductions in Europe, higher shipments of specialised components, and significant reductions in costs. Pilkington s share of joint ventures and associates operating profit fell from 42 million to 33 million, a reduction of 21 per cent, due to difficult conditions at Vitro Plan SA de CV (VVP), our 35 per cent owned associate in Mexico and to the weakness of the Mexican peso, while the results of Cebrace, our 50 per cent joint venture with Saint-Gobain, were affected by the slowdown in the Brazilian economy. The detailed composition of the results, by geographic area and business line, can be seen in note 3 of the Summary Financial Statement. Exceptional items Exceptional items comprise losses of 7 million on disposals of businesses and the termination of operations, the most significant being the loss on termination of the AGR operations in New Zealand and the Building Products toughening and laminating operations in Brazil. Additionally, the Pilkington Aerospace businesses were sold during the year but after the write off of the goodwill previously taken against reserves of 4 million, no significant profit or loss arose. Interest payable and similar charges Net interest payable of 69 million was 4 million lower than the previous year. Subsidiaries net interest charges were similar to last year at 47 million ( million), despite refinancing US$309 million of preference shares with new loans in March This was made possible by lower interest rates and our ability to refinance at these lower interest rates and by the significant improvement in our cash flow over the year. Our share of interest costs in joint ventures and associates decreased by 6 million, mainly because of reduced exchange losses in VVP. Interest costs of Group companies were covered more than three times by operating profit, and nearly eight times by earnings before interest, taxation, depreciation and amortisation of goodwill (EBITDA). Taxation The tax charge of 47 million comprises current tax of 39 million and deferred tax of 8 million. The tax charge as a percentage of profit before tax, exceptional items and goodwill fell to 31 per cent compared with 32 per cent last year. Minority interests Profits attributable to minority interests were 11 million ( million), of which 9 million was equity minority interest and 2 million was non-equity minority interest. 20 Pilkington plc annual review 2004

23 Table 1 Cash flow m m Operating profit Group companies Add back: Depreciation and amortisation Earnings before interest, tax, depreciation and goodwill amortisation (EBITDA) Movement in working capital Movement in provisions and exceptional items (15) (15) Capital expenditure (net of disposals) (104) (161) Operating cash flow Dividends received 8 24 Taxation and servicing of finance (74) (95) Acquisitions and divestments 33 3 Net cash inflow before dividends, management of liquid resources and financing Dividends paid (54) (58) Net cash inflow before management of liquid resources and financing Chart 1 Net debt and gearing Net debt reduced by 28% in two years m Gearing % Net debt Preference shares Non-equity minority interests have fallen, as reported in 2003, as a result of the redemption of US$309 million of preference shares issued by Pilkington Channel Islands Limited in March In future it is envisaged that minority interests will remain at a similar level to this year. Earnings per share Earnings per share before exceptional items and goodwill increased from 6.5p to 7.4p, and basic earnings per share also increased from 5.4p to 6.2p. This is due to the lower interest, taxation and minority charges. Dividends Dividends paid and proposed represent 5.0p per share, unchanged from The dividend is covered 1.2 times by attributable earnings after exceptional items. CASH FLOW Pilkington has delivered a record year of cash generation. Operating cash flow improved by 67 million from 206 million to 273 million as set out in Table 1. This is due to continuing tight control of working capital and lower expenditure on fixed assets, partly due to a lighter programme of cold repairs affecting the float glass plants. Net cash inflow before management of liquid resources and financing rose from 80 million to 186 million, assisted by 40 million proceeds from the divestment of the Pilkington Aerospace businesses. Interest paid of 23 million was reduced by a cash inflow of 36 million arising from rearrangement of interest rate swaps. This income is being amortised to the profit and loss account over eight years in line with standard accounting practice. FUNDING AND LIQUIDITY Net debt Net debt of 664 million at the year end comprised gross debt of 756 million, less cash and marketable investments of 92 million. This is a net reduction in the year of 197 million and represents clear success with one of Pilkington s key strategic objectives. The trends of reduction in net debt and gearing over the last two years are set out in Chart 1. Sources of finance Pilkington is financed by a mix of cash flow from operations, short-term borrowings and longer-term loans from banks, capital markets, and finance leases. Chart 2 shows the weighting of each source at 31st March Funding is also obtained from securitisation programmes, whereby receivables are sold to banks on a non-recourse basis. Pilkington is not obliged to support losses on the non-recourse element of the receivables sold, which are usually around 65 to 90 per cent of the total. Liquidity management Pilkington s funding policy is to ensure continuity of finance at reasonable cost, based on committed funding, arranged for a range of maturities and sources. During the year Pilkington issued a US$200 million Private Placement in the United States with seven, ten and 12 year tranches and arranged further bank bilateral facilities totalling 153 million. As a result of this refinancing activity, the 260 million syndicated Revolving Credit Facility, which was due to mature in December 2004, was cancelled and other smaller borrowing lines were allowed to mature. At 31st March 2004, the average maturity of our committed borrowings was six years, varying from one to more than 11 years. At 31st March 2004, Pilkington had 433 million of unutilised committed facilities, with an average maturity of four years. The maturity profile of our total committed facilities is depicted in Chart 3. The facilities due to mature in financial year 2005 total 30 million, representing less than three per cent of total committed facilities. Pilkington also has access to substantial uncommitted and shortterm facilities, used principally to manage day-to-day liquidity and working capital requirements. In addition, pooling, netting and concentration techniques are used where possible to minimise borrowings. Pilkington plc annual review

24 Finance director s review continued Chart 2 Debt Sources Chart 3 Committed facilities: maturity profile m % Bank loans 31% Eurobond % US private placement > % Finance leases The Group borrows principally in US dollars, euro and sterling, at both fixed and floating rates of interest, using derivatives where appropriate, to generate the desired effective currency and interest rate base. The derivatives used for this purpose are principally interest rate swaps and forward foreign exchange contracts. Speculative trading of derivatives or financial instruments is not permitted. The Group has obtained long-term investment grade credit ratings from Moody s and Standard & Poor s, the credit rating agencies. Moody s rating is Baa2 stable outlook whilst Standard & Poor s rating is BBB with negative outlook. Both ratings are investment grade. Moody s removed their previous negative outlook during the year. Pilkington aims to maintain investment grade credit ratings from both agencies and the significant improvement demonstrated in our cash flow and reduction in net borrowings should help underpin the ratings. Shareholders funds Shareholders funds and minority interests decreased slightly from 781 million to 771 million. The decrease was principally due to exchange losses on the translation of overseas subsidiaries, joint ventures and associates exceeding the retained profit. Treasury management Treasury activities are centralised in the Group s head office in St. Helens. Group Treasury is responsible for the provision of Group liquidity management, and for management of the Group s interest and foreign exchange risks, operating within policies and authority limits approved by the board. The board approves a defined set of financial counterparties, noted for their strong credit standing. Treasury operations are reviewed annually by the Group Internal Audit function to ensure compliance with Group policies. Material foreign exchange transactions are hedged when reasonably certain, usually through the use of foreign exchange forward contracts. Pilkington has manufacturing operations in 24 countries. Assets are hedged where appropriate, by matching the currency of the debt to the net assets. Exposure to interest rate fluctuations on our borrowings is managed by borrowing either on a fixed or floating rate basis and by entering into interest rate swaps or forward rate agreements. The policy objective is to have a target proportion, currently 30 to 70 per cent of forecast net borrowings, hedged at all times. At the end of March 2004, 55 per cent of borrowings were at fixed rates for an average period of five years. The impact of a one per cent change in interest rates affecting all our variable rate borrowings would be approximately 3 million. Energy costs comprise around 20 per cent of the factory gate production cost of float glass. The Group operates a centralised hedging programme to minimise the volatility of energy costs in the major risk markets. Gas prices in the USA are particularly volatile and are monitored closely and appropriate hedges put in place with bank counterparties. Energy-related surcharges on deliveries to North American customers have become established industry practice. POST-RETIREMENT BENEFITS Several different pension schemes are operated in the major territories in which Pilkington operates. They are accounted for under SSAP 24 Accounting for Pension Costs. The disclosure requirements of FRS 17 Retirement Benefits are set out in note 38 to the Directors Report and Accounts. Rising longevity allied with the worldwide stock market values continues to raise the profile of company pension obligations. The nature of Pilkington s pension obligations and the way they have been structured and managed over many years means that the risks to the company have been substantially mitigated. Most Pilkington employees are members of defined contribution schemes, only ten per cent of the Group s employees being members of conventional defined benefit pension schemes. The only significant funded defined benefit schemes in the Group are in North America, and they were closed to new members in the 1980s while benefits to existing members were frozen in the 1990s. At 31st March 2004, on an FRS 17 basis, the North American schemes had a total deficit of 58 million. Company contributions of approximately 9 million are anticipated next year. Unfunded pension schemes, which are common in continental Europe, in Germany and Austria, are closed to new members and, being unfunded, are not affected by stock market movements. The Group also has obligations to fund post-retirement healthcare benefits, principally in the USA. The FRS 17 based valuation of these obligations at 31st March 2004 was 169 million. Pilkington s obligations to fund this scheme are limited by an agreed annual per capita cost increase of four per cent, with 1993 as the base year. Retired members fund the difference between this limit and the actual level of healthcare inflation. The scheme is closed to new employees, although existing employees continue to receive healthcare benefits on retirement. 22 Pilkington plc annual review 2004

25 Table 2 Post-retirement benefits FRS 17 surplus/(deficit)* m Funded pension schemes UK North America (58) Other 1 Unfunded pension schemes Europe (163) Healthcare US (169) Total deficit as determined under FRS 17 (389) Pension and post-retirement healthcare balances already provided under SSAP Additional liability on adoption of FRS 17 (125) * Deficits are net of deferred tax Table 2 summarises the key aspects of the post-retirement benefit schemes at 31st March ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS The International Financial Reporting Standards Regulation, adopted by the European Union (EU), requires all EU listed companies to use endorsed International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB), to report their consolidated results with effect from 2005/2006. The IASB has undertaken an extensive programme to develop new standards and improve existing ones. This work is continuing and the development of the IFRSs to be adopted in 2005/2006 will be finalised in 2004 after which the EU will complete its endorsement process. Pilkington has established a project to manage the transition from UK GAAP to IFRS, and work has been undertaken to identify changes to accounting policies and conduct training courses in the new rules for Pilkington finance personnel worldwide. Business systems will require amendment and wider business issues arising from these fundamental changes are being addressed. The project is progressing in line with plans set out 18 months ago and the Group expects to be fully prepared for the transition at 1st April At present, the full effect of adopting IFRS has not yet been quantified, but it appears that the most significant differences between our current accounting practices and IFRS will be in pensions and termination benefits, deferred taxation, research and development costs, dividends and profit and loss account disclosures. INSURANCE AND RISK MANAGEMENT Pilkington has an established system of internal controls. The Internal Audit function reports directly to the Audit Committee and has a rolling audit programme to ensure optimal coverage of Group businesses. A full risk assessment process is undertaken each year and the results are submitted to the Audit Committee. CONTINGENCIES In 1989, Pilkington Holding GmbH made an offer to acquire the minority interests in Pilkington Deutschland AG and Dahlbusch AG. Certain minority shareholders rejected the offer as insufficient. The matter is in the hands of the German courts. In the case of Pilkington Deutschland AG, the initial decision of the court effectively increased the total amount at issue by 10 million. This decision is being appealed by Pilkington Holding GmbH and the minority shareholders. In the case of Dahlbusch AG, no decision has yet been made. GOING CONCERN After considering the year end financial position and future prospects of the company, the directors consider the company has adequate financial resources to continue in operational existence for the foreseeable future and therefore it continues to adopt the going concern basis in preparing the financial statements. Pilkington plc annual review

26 Corporate social responsibility Pilkington seeks to achieve business success through professional, legal, fair, responsible and sustainable business practices. The health and safety of employees, visitors and people living or working in communities adjacent to Pilkington operations and the protection of the environment, remain top priorities. RESPONSIBILITIES The Pilkington Code of Conduct sets out the responsibility that everyone working for the Group has for behaving in a legal and ethical manner in relationships with fellow employees, customers, suppliers, business partners, the community and other stakeholders in the business. Understanding of the code is reinforced by a leaflet The Way we do Business, available in all the major languages spoken in the countries where the Group operates. The code and the leaflet can be viewed on the company website. The group chief executive is responsible for all aspects of Corporate Social Responsibility (CSR) including health, safety and environmental issues and is personally informed of every lost time accident in the Group. The executive board receives a report on health, safety and environment at each of its meetings and at three of these meetings during the year, discusses health and safety, environmental issues and wider aspects of CSR in more detail and approves plans for improvements. The board of directors and the individual Automotive and Building Products business line boards also receive reports on health, safety and environmental issues at each of their meetings. The Group has a full-time head of environmental affairs and safety and another senior manager includes in his responsibilities the co-ordination of CSR issues. RISK MANAGEMENT, COMPLIANCE AND REPORTING OF CONCERNS Group procedures for the review and management of risk include CSR and have been used to help determine CSR policy and priorities. Given the nature of the glass manufacturing process, health, safety and the environment are top priorities. The effective application of the Pilkington Code of Conduct is monitored through: statements of effective business control to which businesses must adhere and the annual letter of representation which business heads sign to indicate that their businesses comply with these statements. The results of this process for the current year confirm a high level of compliance. The level of compliance is reviewed by the Audit Committee and appropriate action taken. regular on-site business audits carried out by the Group s Internal Audit function. These include checks on the application of the code and, from the coming year, checks on data collection relating to CSR employment standards. Implementation of the Code of Conduct and distribution of supporting leaflets was completed for all Group businesses in 2003 apart from those in China, which have been addressed during A reporting of concerns procedure enables employees to report instances of illegal or improper behaviour by another member of the Group or someone externally who is connected to the Group, such as a supplier or contractor. The procedure reinforces the Group s commitment to maintaining the highest standards of honesty, openness and accountability by making clear what employees should do if they have a concern and by assurances that any concerns expressed will be dealt with seriously and fairly. MANAGEMENT OF HEALTH, SAFETY AND ENVIRONMENT The health and safety of employees, contractors working on Pilkington premises, visitors and those living or working in communities adjacent to our operations are of paramount importance. Organisational structures and procedures for the management of health, safety and environment (HSE) are in place to underpin this objective. The group head of environmental affairs and safety, in addition to his Group role, also leads the global Building Products HSE team. Each of the four Building Products regional businesses has a senior HSE manager reporting to the head of the business and each large site employs a full-time professional HSE manager reporting to the senior site manager. Smaller sites have access to a shared professional resource. The arrangements in Automotive mirror those in Building Products with a head of HSE for Automotive worldwide providing the necessary global co-ordination. The HSE professionals, wherever based, support each other and provide a significant pool of specialised expertise for the Group as a whole. To ensure that a consistent approach is taken across Pilkington, the group head of environmental affairs and safety chairs a global HSE team drawn from the two business lines. Full participation in HSE matters is required at all levels and the formation of local safety committees of employees and their representatives is encouraged. These committees and specialists from engineering, technology and manufacturing work closely with the professional HSE teams. SAFETY PERFORMANCE Pilkington policy requires that all incidents are reported, not just those leading to accident and injury. This is facilitated by an intranet-based accident and incident reporting system which is accessible from all facilities worldwide apart from China. 24 Pilkington plc annual review 2004

27 Lost Time Accident Rate (LTAR) Number of lost time accidents per 200,000 hours worked by Pilkington employees and long-term contractors Safety performance is measured using two indices: the lost time accident rate (LTAR), and the significant injury rate (SIR). A lost time accident is an injury which prevents a person from returning to work on the following day or shift. A significant injury is a less severe incident preventing someone from undertaking their normal job. Both indices are based on 200,000 working hours equating approximately to the time worked by 100 people in one year. The Group LTAR for 2004 was 0.87, an improvement of 20 per cent over last year which adds to the significant improvements achieved over the last seven years. The SIR is a new index introduced in 2003 and data collection procedures are still being refined. The SIR for 2004 was 2.68, a two per cent improvement based upon a revised figure for the previous year. These improvements derive from the implementation of effective safety procedures and the positive response of employees throughout the Group. Examples of milestones reached during the year are: Automotive plants at Clinton and Shelbyville in the USA achieved two million man-hours without a lost time accident and Building Products manufacturing operations in the UK and at Laurinburg, USA achieved one million man hours. Building Products Sweden had no lost time accidents for 12 months across its nine sites and other sites in Building Products Europe such as Venlo, Waalwijk and Sheffield achieved more than three years without a lost time accident, while Middlesborough achieved four years. The total time lost as a result of accidents and work-related illness during the year was 6,400 man-days. In line with LTAR and SIR statistics, these figures do not include long-term absence or invalidity beyond one year, nor absence unrelated to workplace illness or injury. There were no fatal accidents on any Pilkington site during the year. Regrettably, a Polish employee died as a result of a car accident while on the way to meet a customer. Pilkington continues to pursue a rigorous safety risk assessment process on all activities, enabling controls to be put in place to ensure the risks posed by potential hazards are as low as practicable. In a diverse glass manufacturing business, the workforce has to be protected from a wide range of workplace hazards. However, analysis of injuries shows that the majority derives from simple activities such as moving heavy weights, slips, trips and falls. For this reason, behavioural safety programmes focus on recognising potential hazards and understanding the safety implications of personal decisions. To emphasise their commitment, all executive directors and senior managers worldwide have undergone basic training in behavioural safety and adopted personal objectives for the programme. Each business line includes a behaviour safety element in their overall safety programme. Employees throughout Pilkington have access to occupational health and hygiene services. As part of the behavioural safety programme, Pilkington encourages employees to recognise that their medical condition and its treatment may present additional risks to the safety of themselves or their colleagues and to report health-related issues in confidence to medical personnel. This ensures that health and safety managers can make suitable arrangements to ensure everyone s wellbeing. Procedures exist to ensure contractors follow safe working practices and integrate their working arrangements with those of Pilkington. The safety training required by contractors is identified and their safety supervision and performance monitored. All incidents involving contractors are notified and investigated as if they involved employees. Contractors who fail to maintain the necessary standards are dismissed, as has happened on construction sites in Brazil, Germany and Russia. ENVIRONMENTAL PERFORMANCE Energy and resource usage Significant effort continues to be directed towards improving environmental performance, with the efficient use of energy and water being priorities. At the same time, environmental data is continuously reviewed and improved information is incorporated when it becomes available. Glass manufacturing is an energy intensive process. However, energy usage is off-set by the contribution that sophisticated glass products make to saving energy and the sustainability of the industry. The contribution of Pilkington products is discussed in the section on relationships with customers. Diesel oil usage reported in the charts is predominantly that used in the manufacturing process. In addition, the North American Automotive aftermarket business, with over 100 branches, is a significant user of diesel oil for distributing product by vehicle and consumed 30 million litres in Efforts to reduce water consumption have continued across the Group, with a reduction of 15 per cent achieved. Examples are: In Australia, which is in an extended period of drought, the Geelong site has reduced water consumption by 19 per cent by installing a filtering and recycling plant to provide water for Pilkington plc annual review

28 Corporate social responsibility continued Resource usage The charts below show the energy and other resource usage of the Group. For presentational reasons the units vary according to resource. *updated figure Natural gas/10 million cubic metres Heavy fuel oil millions litres Diesel oil millions litres * LPG/100 tonnes Electricity/100GWh * Water/million cubic metres Timber/1,000 cubic metres Recycled glass/1,000 tonnes cooling, washing and grinding and the Ingleburn float line is participating in the every drop counts water saving programme. Collingwood, Canada has introduced a new recycling scheme to cut water consumption by 25 per cent and Versailles, USA has introduced water softeners to achieve significant reductions in consumption. There was a 60 per cent increase in the quantity of glass bought in for recycling. Coupled with a 21 per cent reduction in the disposal of waste glass, this represents a significant reduction in the use of primary resources. Timber usage has also been reduced and in Brazil the use of timber from sustainable forestry has been encouraged with wooden packing cases now prominently indicating their sustainable origin. Energy reduction programmes linked to reducing carbon dioxide emissions have continued and include the further development of cullet recycling programmes, for example, in Chile, Australia and the UK. Pilkington Energy Efficiency Trust The Trust, established in 1999, provides financial support for research, testing or demonstration projects to improve energyefficiency practices in buildings amongst building designers and users in the UK. The projects do not have to be glass-related. Pilkington donates to the Trust, run by a Board of Trustees independent of Pilkington, which selects projects for support. Proposals come from universities, architectural practices, nongovernment organisations or energy-efficiency specialists. The Trust is now widely recognised as an important facilitator of research with an increasing number of applications received each year. Recent projects have included research into public understanding of climate change, development of techniques to increase the energy-efficiency of schools and the evaluation of technologies to increase the efficiency of solar energy used in buildings. Through the Trust, Pilkington believes it contributes to making buildings more energy efficient and sustainable. Emissions Carbon dioxide emissions are defined in two ways, reflecting variations in policy in different countries. The first includes carbon dioxide emitted directly by fuel combustion and decomposition of certain raw materials in the glass-making process and by the generation of the electricity used in the process. This definition, used in the chart on page 27, indicates carbon dioxide emissions of four million tonnes in 2004, an increase of 7.4 per cent over last year. The second definition excludes carbon dioxide emitted during electricity generation. Emissions measured in this way amounted to three million tonnes in 2004, an increase of five per cent. This measure is closely related to glass production and, for a given output, can only be reduced by increasing the use of recycled glass as a substitute for raw materials. Recycling is, however, limited by the availability of recyclable glass of acceptable quality. The increase in absolute carbon dioxide emissions results from increased float glass production of four per cent, the higher use of diesel oil reported earlier and a significant increase in the glass area processed in the Automotive and Building Products downstream businesses. Total waste material has been cut by 15 per cent although within this total there is a small increase in the quantity of hazardous waste, resulting from furnace rebuilds. The quantities of material sent for recycling has fallen, reflecting improvements in internal materials usage. Environmental programmes are also underway that have a direct impact on local communities. Examples are: Acoustic screening at Argentinean and Chilean plants has reduced the noise impact on neighbours. Improvements to the treatment of wastewater in Brazil have increased the supply of good quality water downstream of the plants. Dandenong, Australia recycles almost all of its waste batch and cullet either internally or externally, thereby diverting potentially hazardous waste away from landfill sites. This scheme has earned environmental awards from Victoria State and the Dandenong Chamber of Commerce. The Lathrop, California plant received a notice of violation as a result of failing a stack test because of sulphur and particulate emissions above the permitted level. The issues surrounding sulphur dioxide were complex due to ambiguity in the permit wording but the plant paid a penalty of US$39,040 to the District Regulatory Authority. International environmental quality standards 97 per cent of the Group s medium and large-scale manufacturing sites in both business lines have been certified to ISO 14001, the internationally recognised environmental standard. These sites account for over 70 per cent of business by turnover. Work is in progress to achieve accreditation of the remaining sites in this category. 26 Pilkington plc annual review 2004

29 Emissions The charts below indicate the trend in the emissions of carbon dioxide and other key emission products. For presentational reasons the units vary according to emission product. *updated figure CO 2 /1,000 tonnes , , ,756* ,034 NO X /10 tonnes , , ,881* ,689 SO X /10 tonnes Hazardous waste tonnes , , , ,957 Non hazardous waste/100 tonnes , , , ,424 Products for recycling/10 tonnes , , ,941 Glass for recycling/1,000 tonnes Legacy issues Pilkington continues to work with regulatory authorities worldwide on issues relating to historic industrial activity on and around Group premises. The continuing remedial work at the Ottawa float glass plant in Illinois involves the removal of historic contamination from two neighbouring properties in accordance with a plan developed with the US Environmental Protection Agency. The project has attracted media interest and a degree of public discussion. In work of this kind, the safety of neighbours and employees and the protection of the environment remain the greatest concern. Partnership with government In Europe, the Group has worked closely with governments, both directly and via trade associations, on the implications and practical aspects of the introduction of the EU Emissions Trading Directive. In the UK, the existing voluntary agreements and the UK Emissions Trading Scheme have continued to provide useful lessons for the operation of our facilities. So far, Pilkington has invested more than 7 million in research and development on energy and carbon dioxide reduction measures during the period of the UK climate change agreement. Pilkington continues to support measures to combat climate change and, in principle, the concept of greenhouse gas trading. The timescales and lack of clarity in the current EU proposals remain of concern. These do not recognise the valuable contribution made to climate change programmes by Pilkington products (e.g. energy efficient glass), nor the possibility that reductions in greenhouse gases in the EU will be offset by increases in countries not bound by the Kyoto protocol. The float lines in Venice, Sagunto and Freyming-Merlebach participated in the REMAS pilot project sponsored by the European Union to investigate the contribution of environmental management systems to improved environmental performance. RELATIONSHIPS WITH STAKEHOLDERS IN THE BUSINESS Employees The Code of Conduct acknowledges internationally proclaimed human rights and the impact these have on employment. The Group s overall employment policy contains minimum employment standards expected of all operations and employees and guides employment policy and practice in individual businesses. The standards derive from external international human rights employment guidelines and the business requirements of Pilkington. They ensure that, as a minimum, the Group complies with the employment laws, regulations, industry standards and local customs within the countries in which it operates and with relevant international guidelines. In practice, the Group frequently exceeds the local and international requirements. These standards provide employees with reassurance on how they will be treated and will lead to a more successful business through a committed, motivated and effective workforce. A number of elements of the overall employment policy are reported upon here. Representation of women in the workforce In 2004, women represented 15 per cent of the workforce, a level unchanged from last year. The proportion of women in management roles remained at 12 per cent. In the UK, 20 per cent of graduates recruited in 2004 were female compared to 40 per cent achieved over the previous three years. This fall is a short-term feature and is not considered to be part of a trend. Given relatively low levels of labour turnover and a generally reducing working population, the proportion of women in the workforce is not expected to change significantly, year to year. The Group will continue to provide women with every opportunity to join the organisation and to develop their careers to their full potential. By doing so, greater representation of women at all levels in the workforce will be encouraged. Employment of young people The Group employs no young people under the age of 15. It is also uncommon for individuals under the age of 18 to be employed except on a temporary basis as part of their education studies. Consultation and communication Throughout the Group, arrangements exist for communication and consultation with employees at site level. The nature of these arrangements varies according to the scale and circumstances at each site. In Europe a region-wide European Forum meets annually to discuss overall Group and business line strategy, business performance, the business outlook and the implications for employees. It is attended by employee representatives, the group chief executive, business line presidents and key senior management. There are separate sixmonthly meetings of sub-groups for Building Products and Automotive Products to discuss more detailed topics. A formal system of regular communication and briefing ensures all employees receive updates on Group and local business objectives, targets and best practice. Every eight weeks, each Pilkington plc annual review

30 Corporate social responsibility continued employee receives a copy of Pilkington Focus in their own language and the Pilkington intranet is available to every employee on the Group network providing information on all aspects of the Group s activities worldwide. Earnings There are no parts of the Group where earnings are less than the legal minimum or the minimum set by the local industry. Working hours In 2004, no employee in the Group was contracted to work a standard week in excess of the international guideline of 48 hours. Three per cent of the workforce, at some stage in the year, voluntarily worked more than the international guideline of 12 hours overtime in a week. This was not on a regular or contractual basis. Discrimination and harassment There were no reported and proven cases of discrimination in the Group during One case of harassment was reported and after investigation was found to be proven. This case was managed using standard internal procedures and appropriate action was taken. Training and development The Group recognises the importance of training, retraining and continuous development for all employees to support higher standards of performance, new technology and work practices and the more demanding roles created by flatter organisational structures. In 2004, the Group spent 4.5 million on formal, off-the-job training and development, ranging from initiatives to meet specific local business needs to Group programmes aimed at the longerterm development of international managers. Health and safety remains a critical element of training for everyone. On-the-job training is an effective means of raising plant performance which continues to enhance skills through planned initiatives in the workplace. For practical reasons, the resources devoted to on-the-job training are not recorded. A modular development programme for those in or approaching supervisory and junior management roles has made significant progress. Over 260 people in the UK and USA have completed or are currently working through modules and the programme will be launched in South America in the coming year. Other subsequent launches are planned. This programme complements existing, wellestablished initiatives aimed at the development of middle and senior management across the Group. The Group continues to explore and extend the use of e-learning as a means to make cost effective training available to a wider audience. CUSTOMERS Quality is a key feature of Pilkington s relationship with industry customers and end consumers encompassing design, development, manufacture, delivery, assembly, price, customer support and in-service use. High quality reduces waste throughout the supply chain thereby improving efficiency for everyone and reducing adverse impacts on the environment. In Pilkington, high quality is supported by the use of rigorous quality management systems and standards. Examples are: The Automotive business is introducing a single global quality management system which, during the last 12 months, has been implemented in all manufacturing plants in Europe, North America and South America, with external certification subsequently achieved to the new TS 16949:2002 standard. The Australian quality system will be rolled out and externally certified during the next 12 months. All major Building Products manufacturing plants in Europe, South America and Australasia have been accredited to ISO 9001:2000. North America aims to achieve the transition from a local to the ISO standard in the coming year. In Europe, Pilkington has pursued new European building industry standards that encourage consistently high product quality. These will come into force in the next year and will provide compliance with the Construction Products Directive. Predictions are made of potential problems as products progress through the supply chain, in order to determine any manufacturing or product development necessary to avoid them. This frequently involves working closely with vehicle manufacturers and architects at the vehicle or building design stage. For instance, collaboration with vehicle manufacturers seeks to minimise waste by recycling which, in Europe, is driven by the End of Life Vehicles Directive. Pilkington provides customers with products that have safety, environmental and in-service benefits. Examples are: The Automotive product range includes: enhanced solar control glazing to reduce the load on air-conditioning systems and fuel consumption, flush glazing to reduce noise and fuel consumption, laminated side-glazing to make break-ins more difficult and acoustic glazing to reduce noise and driver stress. 28 Pilkington plc annual review 2004

31 From left to right. Despatch glassworker Louis Karagaslis demonstrates the correct handling and safety equipment for the job as he inspects the fastenings on a consignment of glass at Dandenong, Australia. Pilkington s commitment to the broader communities in which it operates is well demonstrated here, where Group employees in Brazil help with the decorating and refurbishment of a primary school near one of the company s float glass plants. Larry Hibbard, a Pilkington employee in Toledo in the USA, takes time out of his busy work schedule to take part in HOSTS (Help One Student to Succeed). The HOSTS programme is part of the Ohio Reads literacy initiative and this is Larry s fifth year helping the campaign to improve the reading skills of young children in Ohio. Buildings account for over 40 per cent of the energy consumed in developed countries and products such as Pilkington K Glass TM and Pilkington Optitherm TM reduce heat loss while Pilkington Optifloat TM Tint and Pilkington Suncool TM prevent unnecessary heat build-up thereby reducing the load on airconditioning systems. Pilkington T glass, a toughened product stronger than normal float glass and Pilkington Optilam TM, a laminated glass with high impact resistance, make buildings safer. Pilkington Pyrostop TM protects people from and limits the spread of fire. Pilkington Activ TM, a self-cleaning glass, reduces the costs and dangers inherent in manual cleaning and the use of detergents while Pilkington Optilam TM Phon, a laminated glass, reduces external noise. Customers are provided with guidance in the selection and application of all products and in their safe handling and storage. SUPPLIERS New procedures and criteria for the evaluation of new and existing suppliers are being introduced in which suppliers will be asked to adhere to the CSR standards set out in the Pilkington Code of Conduct. Where a standard is not being achieved, a plan of corrective action will be jointly agreed and its implementation jointly monitored. Pilkington will provide support, where needed, during implementation. The Group also works closely with suppliers to ensure that their products and services not only meet the necessary design, cost, quality and performance requirements but are also backed by recognised quality standards, appropriate environmental practices and safe working procedures. PILKINGTON IN THE COMMUNITY Pilkington aims to ensure that its worldwide operations play a responsible and responsive role in the local communities in which it operates. Local businesses are responsible for consultation and dialogue with their local communities as a means to ensure the Group coexists harmoniously with its community partners to the benefit of all parties involved. The Group and its employees around the world work closely with non-profit organisations on voluntary work programmes and charitable initiatives covering education, arts, medicine, welfare, job creation and urban renewal. In total, the Group s direct community-related contributions amounted to 458,000, complementing the significant inputs of time and skills from employees. Examples of these activities during the year are: A donation of US$10,000 from Pilkington and the local trade union was made in the USA to the Labor and Community Service s scheme Adopt a Family. Pilkington in Argentina donated glass valued at approximately US$35,000 to local community schools and hospitals. Also, employees each year help with the upkeep of a selected institution which this year involved 150 employees in the repair of a local school. Sponsorship for the 16th year of the Royal College of Art Vehicle Design Awards in which Mohammed Arthur Ali, from the UK, won the best design interpretation category and Pratap Bose, from India, won the innovative use of glazing category. Sponsorship of the Window on the World Award which was presented at the annual Women of the Year Assembly to Charlotte di Vita, founder of the ethical trading organisation which helps Third World workers find international markets for their products. Support for Business in the Community initiatives in the UK included helping school pupils to improve reading skills, pairing managers and school heads to share problems, swap ideas and provide mutual support and assisting school pupils prepare for the world of work. Land, which was of a nominal value to the company, has been donated to a project undertaken by local organisations to provide affordable homes for 300 people aged over 55 in St. Helens, UK. The project partners include St. Helens Housing Association Limited which was founded by members of the Pilkington family in Pilkington plc annual review

32 Board of directors Sir Nigel Rudd Stuart Chambers Iain Lough Pat Zito William Harrison James Leng Oliver Stocken Christine Morin-Postel SIR NIGEL RUDD (57) CHAIRMAN Appointed a non-executive director in 1994 and non-executive chairman in He is non-executive chairman of Boots Group PLC and Pendragon PLC and a non-executive director of Barclays PLC. Sir Nigel s wide range of experience, including his executive leadership of Williams Holdings PLC, has been invaluable in giving strategic direction to the Group. He is a member of the Remuneration Committee and chairman of the Nomination Committee. At 31st March 2004 he was interested in 1,962,142 shares in the company. STUART CHAMBERS (48) GROUP CHIEF EXECUTIVE Appointed an executive director in January 2001 and group chief executive in May He joined Pilkington in 1996, as group vice president, Marketing & Business Development, Building Products. In 1998 he was promoted to the post of managing director, Primary Products Europe, and subsequently became president, Building Products Worldwide. He is a non-executive director of Associated British Ports Holdings PLC. He is a member of the Nomination Committee. At 31st March 2004 he was interested in 682,736 shares in the company. IAIN LOUGH (57) Appointed an executive director in January He joined Pilkington in 1993 as group financial controller. In 1995 he was appointed head of group finance and in 1998 he was appointed chief financial officer for Building Products Worldwide. He is group finance director. His appointment as a non-executive director of Wilson Bowden plc with effect from 1st September 2004 has been announced. At 31st March 2004 he was interested in 304,558 shares in the company. PAT ZITO (55) Appointed an executive director in May He joined Pilkington in 1985 as finance director of the Group s Australian operations. He was appointed president, Automotive OE Europe in 1997 and president, Automotive OE Europe and North America in October He is responsible for the Automotive business worldwide. At 31st March 2004 he was interested in 463,524 shares in the company. WILLIAM HARRISON (55) Appointed a non-executive director in He is a director of Compass Partners Advisers Limited, an external member of the advisory committee of Pinsents and a member of the advisory board of Moore Clayton LLC. His experience in investment banking has enabled him to give the board valuable advice on transactions and financing arrangements. He is a member of the Audit, Remuneration and Nomination Committees. At 31st March 2004 he was interested in 203,693 shares in the company. JAMES LENG (58) Appointed a non-executive director in He is a non-executive chairman of Corus Group plc. He is also a non-executive director of IMI plc, Alstom SA, and Lennox Managements Limited. His appointment as a non-executive director of Hanson PLC with effect from 1st June 2004 has been announced. The experience he has obtained in executive and non-executive roles in other capital intensive industries has been particularly helpful to the board. He is chairman of the Remuneration Committee and is a member of the Audit and Nomination Committees. At 31st March 2004 he was interested in 229,472 shares in the company. OLIVER STOCKEN (62) Appointed a non-executive director in He is non-executive chairman of Rutland Trust plc, non-executive deputy chairman of 3i Group plc and a non-executive director of Rank Group Plc, GUS plc, Novar plc and Stanhope PLC. His appointment as a nonexecutive director of Standard Chartered PLC with effect from 1st June 2004 has been announced. The board has benefited greatly from his general and strategic advice based on his substantial boardroom and commercial experience. He is the senior independent director, chairman of the Audit Committee and is a member of the Remuneration and Nomination Committees. At 31st March 2004 he was interested in 348,164 shares in the company. CHRISTINE MORIN-POSTEL (57) Appointed a non-executive director in She is a non-executive director of 3i Group plc and Alcan Inc. In 2003 she retired as executive vice-president in charge of group human resources at Suez Group and prior to undertaking such role was chief executive officer of Société Générale de Belgique. Her knowledge of continental European markets and her experience in general management and human resources has been of great benefit to the board. She is a member of the Audit, Remuneration and Nomination Committees. At 31st March 2004 she was interested in 15,940 shares in the company. There have been no changes in directors interests in the share capital of the company between 31st March 2004 and the announcement of the Group s results on 26th May Pilkington plc annual review 2004

33 Summary directors report The following pages are a summary of the information contained in the Directors Report and Accounts for the year ended 31st March The summary financial statement does not contain sufficient information to allow as full an understanding of the results and state of affairs of the company and of the Group as would be provided by the full annual report and accounts. BUSINESS ACTIVITIES AND DEVELOPMENT Pilkington is a leading worldwide producer of flat and safety glass and a successful innovator of products and processes in the glass industry. The Group serves the building and automotive markets. The Chairman s Statement, comment on recent events and likely future developments, and a summarised business review appear in other parts of this document. DIRECTORS The names, biographical details and photographs of the directors are on page 30. Andrew Robb and Dr. Hans-Peter Keitel retired as directors at the conclusion of the annual general meeting held on 28th July Christine Morin-Postel was appointed to the board on 1st August 2003 and will offer herself for election as a director at the annual general meeting. In accordance with the company s Articles of Association Stuart Chambers and James Leng will retire by rotation at the annual general meeting and will offer themselves for re-election. CORPORATE GOVERNANCE With the appointment of Oliver Stocken as senior independent director on 14th May 2003 the company has been in full compliance with the provisions of Section 1 of the Code of Best Practice contained in the Combined Code published in June Although the company is not obliged to comply with the requirements of the Combined Code on Corporate Governance published by the Financial Reporting Council in July 2003 until the financial year ending 31st March 2005, the board has decided to adopt the principles and practices detailed in such Combined Code forthwith. A more detailed report on corporate governance is contained in the Directors Report and Accounts. AUDITORS The auditors report on the full annual accounts of the Group for the year ended 31st March 2004 is unqualified and does not contain any statement concerning accounting records or failure to obtain necessary information or explanations. The statutory financial statements will be delivered to the Registrar of Companies in due course. Summary remuneration report INTRODUCTION This report to shareholders outlines the membership and workings of the Remuneration Committee and provides an explanation of the various elements of the remuneration policy. The report also outlines how the executive and non-executive directors were remunerated during the year. The full report on directors remuneration, contained in the Directors Report and Accounts for the year ended 31st March 2004, will be put to shareholders for approval at the annual general meeting of the company to be held on 20th July remuneration key points The executive directors, excluding Andrew Robb who retired on 28th July 2003, invested their entire annual bonuses in company shares. The performance awards under the Leadership Equity Award Plan made in 2001 will not vest as the minimum earnings per share growth will not be met. None of the executive directors were eligible for share options, (except under the savings-related scheme). Each executive director has a 12 month contract with the company. There were no changes made to executive directors pension arrangements. New higher shareholding targets for executive directors and senior management were implemented. REMUNERATION COMMITTEE The members of the committee are James Leng (Chairman), Sir Nigel Rudd, William Harrison, Oliver Stocken and Christine Morin-Postel. The committee determines the overall remuneration policy for executive directors and for other senior executives within the Group and sets the remuneration packages of individual executive directors, the company secretary and executives who report directly to the group chief executive in his capacity as group chief executive. In addition, it determines and approves annual and long-term incentive plans, including setting appropriate performance targets, and determines the policy relating to the grant of options under the senior executives share option schemes. The full terms of reference of the committee are available on the company s website. The committee met five times during the year to 31st March 2004, and at its request, the group chief executive and the company secretary were invited to attend committee meetings except when matters relating to their own remuneration and service agreements were under discussion. The group human resources director acted as secretary to the committee. The committee has selected Deloitte & Touche LLP to advise it on remuneration practice. During the year, Deloitte & Touche LLP also provided advice to the board on non-executive directors remuneration and advised the company on the expensing of share options and on proposed changes affecting pensions. Advice was also received from the group human resources director and the group compensation and benefits manager. The principal matters considered by the committee during the year were: Annual review of salaries for executive directors and certain senior management. Targets and results for annual incentive plans for executive directors. Performance targets for long-term incentive plans. Grant of executive share options and awards under the Leadership Equity Award Plan and the Deferred Bonus Plan. Share ownership and higher shareholding targets for executive directors and senior management. Pilkington plc annual review

34 Summary remuneration report continued POLICY ON REMUNERATION OF DIRECTORS Objectives of the remuneration policy The objectives of the remuneration policy are to ensure that remuneration packages offered are competitive and designed in such a way as to attract, retain and motivate executive directors of the highest calibre. The policy aims to ensure that individual rewards and incentives are aligned with the performance of the Group and the interests of the shareholders and reflect the contribution of the individuals concerned. The committee aims to align its remuneration policy with the short-term goals as well as the medium to long-term strategy of the Group. Salary and benefit packages are set at market competitive levels, and annual performance-related payments are assessed against the achievement of key financial targets. Share based longterm incentives are used to align the interests of the senior executive group with those of shareholders. This is achieved by linking executive awards to the creation of shareholder value, currently focusing on the growth in earnings per share and the generation of free cash flow. The remuneration policy also encourages personal investment in company shares and continued share ownership in line with the company s shareholding targets for executive directors and senior management, and participation in the long-term incentive plans requires executives to invest part or all of their annual bonus. This policy is expected to continue in future years. The remuneration arrangements meet with the provisions of the Combined Code published in June The main components of the executive directors remuneration The normal remuneration arrangements for executive directors consist of salary, annual financial performance-related bonus, a long-term incentive programme (the Leadership Equity Award Plan) and benefits which include company car, medical insurance and pension entitlement. A significant proportion of the remuneration of the executive directors is linked to corporate and individual performance. The executive directors are not eligible to participate in the Deferred Bonus Plan or the senior executives share option schemes whilst participating in the Leadership Equity Award Plan. Salary The committee reviews the salary for each executive director in April each year. The policy is to broadly align salaries with market medians. However, account is taken of salary increases across the Group and salaries are set by reference to the company s performance, the individual s performance including experience in the role and external market information which is provided by the committee s independent adviser. Base salary is the only element of the executive directors remuneration that is pensionable. Annual performance-related bonus Each executive director participates in an annual performancerelated incentive scheme. The current year s plan for the executive directors, including the group chief executive, provided for a maximum bonus opportunity of 60 per cent of salary. The committee establishes the performance criteria and sets the appropriate bonus parameters. The incentive plans are based wholly on challenging financial performance targets relating to the annual budget which is approved by the board. The plans for Stuart Chambers, Iain Lough and Andrew Robb were based on Group profit and Group cash flow improvement. The plan for Pat Zito was based on Group profit and cash flow improvement and also Automotive worldwide profit and cash flow improvement. Performance against the targets set is reviewed by the committee at regular intervals during the year. No bonus is paid to the executive directors if the agreed minimum targets are not met and bonus payments to the executive directors are not pensionable. Bonuses were awarded on 25th May 2004 following sign off by the auditors. For 2004, the bonus payable to executive directors amounts to 656,275. Stuart Chambers, Iain Lough and Andrew Robb earned 50 per cent of salary and Pat Zito earned 48.5 per cent of salary. Each of the current executive directors has agreed to invest all his bonus in the company s shares. None of the current executive directors have taken a bonus in cash since their appointment to the board. Long-term incentive plan The company has a long-term incentive plan that operates internationally. This is known as the Leadership Equity Award Plan (LEAP), which was approved by the shareholders at the annual general meeting in July 2000 and was introduced in The plan has been designed to provide geared levels of reward in the form of company shares for the achievement of exceptional company performance. Executive directors and selected senior executives are invited by the committee to participate in LEAP. Participants are invited to invest all or a proportion of their annual after tax bonus in the company s shares. If the participants remain in employment and the purchased shares are retained for three years, the company will match their investment with additional shares. The matching by the company is made up of a core award and a performance award. The core award consists of shares to the value of one times the participant s gross annual bonus deferred using the same share price that applied at the time of purchase. The extent of the performance award will depend upon the achievement of stretching performance targets for the Group over the three year period. The Remuneration Committee is responsible for setting the performance criteria and targets and takes independent advice in doing so. The committee considers earnings per share before 2001 Plan 2002 Plan 2003 Plan Award level Core and performance awards Core award 1.0 x gross bonus invested Performance awards Free cash (aggregate over 3 years) EPS EPS EPS 75% flow 25% Entry 24.9p 22.6p 21.2p 241 million 0.5 x gross bonus invested Maximum 29.7p 26.9p 27.1p 300 million 2.5 x gross bonus invested (i) Each plan is based on a three-year period. (ii) The 2003 plan is split 75%:25% between aggregate EPS growth and free cash flow generation over three years. (iii) EPS numbers were adjusted to comply with the adoption of FRS 19. (iv) EPS and free cash flow achievements above the maximum targets pay no more than 2.5x gross bonus invested. 32 Pilkington plc annual review 2004

35 exceptional items (EPS) to be one of the key fundamental financial measures on which the financial value of the company is assessed over the medium to long-term. The use of aggregate EPS is considered a suitably challenging criterion in the current economic environment, and is understood by all international participants. The EPS is calculated as fully diluted earnings per share adjusted for exceptional items and the committee believes that this method of calculation provides an independent and verifiable measure of the company s performance. A minimum level of EPS must be achieved for any performance award to vest. The level of performance awards made will depend on the extent of the achievement of the targets set whereby awards will vest between entry level and maximum on a linear basis. Should these demanding targets be met in full, the performance award will be two and a half times the gross annual bonus deferred. The performance targets for the LEAP performance awards issued in 2001 and 2002 are based on aggregate EPS over a three year period. For the 2001 plan the performance awards will not vest because the minimum aggregate EPS of 24.9p was not met. Therefore participants will not receive any performance awards under the plan. Given the Group s strategy on the generation of free cash flow as well as profit, the committee considered whether it was appropriate to include a cash component in the 2003 LEAP plan. Having consulted with Deloitte & Touche LLP the committee decided that it was appropriate to include a specific cash measure within this plan. The committee considered the generation of actual free cash flow (before any exceptional gains or losses) to be a suitable measurement in determining management effectiveness in generating sustainable cash within the business. This aligns with the stated policy of generating cash for the repayment of debt. As the Group s focus turns to investing for growth, the committee will, at that time, examine the continued appropriateness of the perfomance elements under this plan. However the committee felt that aggregate EPS should remain the key measure of management effectiveness and therefore approved the 2003 plan on the basis of 75 per cent aggregate EPS and 25 per cent free cash flow. The performance targets are set out in the table on page 32. In determining the EPS target for the 2003 plan ( ), the actual 2003 EPS is used as a base and ten per cent compound growth is used to determine the minimum target and 24 per cent used to fix the maximum target. The committee believes that these targets are a reflection of the current economic conditions and represent stretching challenges for the management of the business. The EPS numbers were adjusted to comply with the adoption of FRS 19. The committee considered the objective of cash generation to be the achievement of free cash on a consistent basis and believes this to be critical to the delivery of shareholder value in the long-term. The participants in this plan are not eligible to participate in the Deferred Bonus Plan or the senior executives share option schemes. Core awards vest after three years. Performance awards only vest after the committee has reviewed and confirmed that performance against the conditions set has been met. The Deferred Bonus Plan Prior to the introduction of LEAP in 2001, the executive directors were eligible to participate in the Deferred Bonus Plan. Under this plan the executive director was able to invest part or all of his annual after tax bonus in company shares. In return the company granted the executive director a nil cost option to acquire the company s shares, the value of these shares being equivalent to 1.2 times the gross value of his annual bonus originally deferred. The award is exercisable after three years provided the participant remains in employment and retains his purchased shares for a three year period. The shares purchased by the executive directors for this plan are included in the details of directors shareholdings on page 30. During the year under review Stuart Chambers, Iain Lough and Pat Zito exercised all their awards under this plan and accordingly have no future participation in this plan as long as they participate in LEAP. Share option schemes Prior to the introduction of LEAP in 2001, the executive directors were eligible to receive share options under the executive share option schemes. These options entitled the executive director to buy company shares at a fixed exercise price. The ability to exercise this option is dependent upon the achievement of pre-determined performance targets based on growth in earnings per share over changes in the retail price index (RPI). The target set by the committee in respect of these options granted before December 2002 was RPI plus two per cent per annum. If these performance targets are met for the prescribed three year performance period, the options will be exercisable after three years and up to ten years from the date of grant. Options are only exercisable after the committee has reviewed and confirmed that the performance condition has been met. None of the executive directors exercised any options under these share option schemes during the year to 31st March The approval of the senior executives share option schemes expires in 2004 and it is proposed to extend the term of these schemes on the same conditions. During this year, the committee will be reviewing the role of share options within the Group s remuneration arrangements. The Group also operates a savings-related share option scheme for all UK employees, which includes the executive directors. This scheme was last renewed for ten years at the annual general meeting in The invitation to participate in this scheme made in June 2003 offered a three, five, or seven year contract with an exercise price set at a discount of ten per cent on the applicable market price. An all-employee share ownership plan (now known as a share incentive plan) was approved by shareholders at the annual general meeting in July No invitations or awards have yet been made under this plan. Share ownership The board strongly believes in the value of employee share ownership in order to continually align the interests of employees with those of shareholders and for a number of years has given share ownership targets to the executive directors and certain senior executives. During 2003, the target for the group chief executive was increased to 500,000 shares and for other executive directors to 300,000 with a target achievement date of June Increased targets were also implemented for senior executives. The revised targets for the executive directors have now been met and the committee intends to continue reviewing the progress against targets on a regular basis and setting new targets. Pensions All executive directors are entitled to a pension on retirement and such pensions are calculated in a similar way to pensions provided under the Pilkington Superannuation Scheme. The pension Pilkington plc annual review

36 Summary remuneration report continued arrangements for the executive directors are affected by the Inland Revenue cap on approved pension benefits. Their arrangements are determined on an individual basis and are in part funded through the Pilkington Superannuation Scheme or personal pension plans with the unapproved balance being provided through the Pilkington Unfunded Top-Up Scheme. Different arrangements applied for Andrew Robb who retired from the board on 28th July 2003 and from the company on 31st December Service agreements It is the policy of the Remuneration Committee that executive directors should have contracts terminable by no more than one year s notice. All existing executive directors have a contract with a notice period of no more than one year. Details of the terms of the contracts of each of the executive directors are shown in the table set out below. In the event of termination by the company, other than for misconduct, each director s service agreement provides for a maximum payment of 12 months pay and benefits. In the case of the existing executive directors those benefits, which are specifically covered by this arrangement, include pension arrangements, private healthcare and the provision of a company car. Details of the director seeking election and the directors retiring by rotation and seeking re-election are referred to on page 31. Stuart Chambers has a service agreement, which expires on 25th May 2016, unless termination occurs earlier in accordance with its provisions. James Leng and Christine Morin-Postel do not have service agreements, but do have letters of appointment for a term, which expires in the case of James Leng on 10th September 2004 and in the case of Christine Morin-Postel on 31st July Policy on external appointments The committee believes that the company can benefit from its executive directors holding non-executive appointments and also believes that this represents a valuable opportunity in terms of personal and professional development. Such appointments are subject to the approval of the board and it is the company s practice that each executive director may only accept one such appointment, and that fees from that appointment may be retained by the executive director concerned. Stuart Chambers holds a nonexecutive directorship with Associated British Ports Holdings PLC. Andrew Robb held a role as a non-executive director with Alfred McAlpine plc up to 22nd May 2003 and became a non-executive director of Kesa Electricals plc with effect from 1st June Neither Pat Zito nor Iain Lough hold non-executive directorships. Policy on remuneration of the chairman and non-executive directors The remuneration of the chairman is determined by the committee and the remuneration of the non-executive directors is determined by the board. The Articles of Association contain a limit on the aggregate remuneration. They are not eligible for performancerelated bonuses or awards under long-term incentive plans and no pension contributions are made on their behalf. Since June 2000, the annual fees for the chairman and the non-executive directors have been paid exclusively in shares. EXECUTIVE DIRECTORS REMUNERATION The remuneration of the executive directors, excluding pension contributions, is summarised in the table below: Salary Other Annual Loss of Total Salary Other Annual Loss of Total benefits bonus (5) office benefits bonus office Stuart Chambers (6) Iain Lough Pat Zito (1) Andrew Robb (2) Paolo Scaroni (3) Warren Knowlton (4) ,800 1,994 1, ,141 1, ,800 4,207 (1) Appointed to the board on 28th May 2002 and remuneration in 2003 reflects his promotion to the board. (2) Retired as an executive director on 28th July 2003 and the specified remuneration here is in respect of the period in which he was a director. (3) Resigned as an executive director on 30th June (4) Resigned on 30th July Denominated in US dollars and translated into sterling at an average exchange rate of US$1.55: (5) With the exception of Andrew Robb, executive directors will use these bonuses to purchase shares for their participation in LEAP. (6) Remuneration reflects appointment as group chief executive from 28th May Date of Notice period Unexpired term to service agreement from company normal retirement date Stuart Chambers 3rd December months 12 years Iain Lough 7th February months 2 years 8 months Pat Zito 3rd December months 4 years 8 months Other benefits set out in the executive directors remuneration table incorporate all tax assessable benefits arising from employment by the company. The major benefits are the provision of a company car and private healthcare for Stuart Chambers, Iain Lough and Pat Zito. In addition, because Pat Zito is an expatriate based in the United Kingdom, he receives further benefits in accordance with Group policy including 84,000 for the provision of accommodation. The benefits for Andrew Robb, who retired as a director on 28th July 2003, included private healthcare and a cash allowance of 5,000 in lieu of the provision of a company car. During the year ended 31st March 2004 Stuart Chambers received an amount of 32,500 in respect of his services as a non-executive director of Associated British Ports Holdings PLC. Andrew Robb received an amount of 4,718 in respect of his services as a nonexecutive director of Alfred McAlpine plc and an amount of 6,667 in respect of his services as a non-executive director of Kesa Electricals plc. 34 Pilkington plc annual review 2004

37 CHAIRMAN S AND NON-EXECUTIVE DIRECTORS REMUNERATION The chairman and all non-executive directors are paid exclusively in shares, which they are required to hold for four years, other than to the extent necessary to fund their tax liability on receipt of the shares. The details of the remuneration paid and due to the chairman and non-executive directors for 2004 are shown below. The disclosure under the heading aggregate value of shares allotted and to be allotted at the reference price of 50.52p includes the shares allotted in June 2003 and December 2003 at such reference price and the shares to be allotted in June 2004 at such reference price in respect of the period from 1st December 2003 to 31st March Aggregate Market Number of Aggregate Aggregate Number of number of value shares to be value of shares value of shares shares allotted shares allotted of allotted allotted in allotted and to allotted at in respect of in June 2003 shares June 2004 be allotted at the reference year ended and December on dates of the reference price of 31st March 2003 allotment (1) price of 50.52p p 2003 (2) Sir Nigel Rudd 332, , ,416 Dr. Hans-Peter Keitel 26, ,676 William Harrison 53, , ,676 James Leng 69, , ,326 Oliver Stocken 69, , ,326 Christine Morin-Postel 26, , Paolo Scaroni 42 35, , , ,155 It should be noted that: (1) The share prices at close of business on 2nd June 2003 and 1st December 2003, the dates of allotment, as shown by the Daily Official List of the London Stock Exchange, were 72.5p and 93p respectively. (2) The share prices at close of business on 6th June 2002, 2nd December 2002 and 2nd June 2003, the dates of allotment, as shown by the Daily Official List of the London Stock Exchange, were 101p, 65.75p and 72.5p respectively. (3) During the year ended 31st March 2004 the highest and lowest share prices at close of business, as shown by the Daily Official List of the London Stock Exchange, were p and 49.25p respectively. (4) The share price at close of business on 31st March 2004, as shown by the Daily Official List of the London Stock Exchange, was 89.5p. DIRECTORS EMOLUMENTS AND OTHER BENEFITS The aggregate emoluments and other benefits of the directors of the company set out below are disclosed in accordance with Part 1 of Schedule 6 to the Companies Act Aggregate emoluments 2,581,000 2,873,000 Gains made on exercise of share options 507,914 1,048,870 Amounts paid under long-term incentive schemes Compensation for loss of office 1,800,000 Pension contributions to money purchase schemes Three executive directors are accruing retirement benefits under defined benefit schemes. PERFORMANCE GRAPH In accordance with the requirements of the Companies (Summary Financial Statement) Amendment Regulations 2002, below is a line graph comparing the total shareholder return of the company over the last five years with the total shareholder return of the FTSE 250 index of companies, of which the company is one of the constituent companies. In this context shareholder return reflects share price movements and assumes all dividends are reinvested in the company s shares at the relevant ex-dividend date. 250 TOTAL SHAREHOLDER RETURN (TSR) 5-YEAR GRAPH (COVERING THE PERIOD FROM 1st APRIL 1999 TO 31st MARCH 2004) TSR (RE-BASED TO 1st APRIL 1999) PILKINGTON FTSE 250 INDEX 50 3-MONTH MOVING AVERAGE March 1999 March 2000 March 2001 March 2002 March 2003 March 2004 FINANCIAL YEARS ENDED Pilkington plc annual review

38 Group profit and loss account For the year ended 31st March Note m m Turnover continuing operations Group turnover 3 2,440 2,414 Share of joint ventures and associates turnover Turnover including joint ventures and associates 2,751 2,754 Operating profit Group s continuing operations Share of joint ventures and associates Operating profit including joint ventures and associates Exceptional items 5 Loss on disposal/termination of continuing operations: Loss on disposal/termination (9) (3) Previous provision utilised 2 1 (7) (2) Loss on disposal of fixed assets and investments in continuing operations (2) (7) (4) Profit before investment income and interest Investment income 1 Net interest payable and similar charges (69) (74) Profit on ordinary activities before taxation Taxation (47) (49) Profit on ordinary activities after taxation Minority interests (including non-equity) (11) (23) Profit attributable to shareholders Dividends (63) (63) Retained profit of the Group 15 5 Directors emoluments 3 3 Earnings per share (basic) 6.2p 5.4p Fully diluted earnings per share (basic) 6.2p 5.4p 36 Pilkington plc annual review 2004

39 Summary group balance sheet As at 31st March m m Assets employed Fixed assets Intangible fixed assets Tangible fixed assets 1,380 1,520 Investments joint ventures, associates and trade investments ,695 1,859 Current assets Stocks Debtors Investments marketable Cash at bank and in hand Creditors amounts falling due within one year (605) (670) Net current assets Total assets less current liabilities 1,954 2,111 Financed by Creditors amounts falling due after more than one year Provisions for liabilities and charges ,127 1,309 Deferred income ,183 1,330 Capital and reserves Called up share capital Reserves Total equity shareholders funds Minority interests (including non-equity) The financial statements on pages 36 to 40 were approved by the directors on 26th May ,954 2,111 Directors Sir Nigel Rudd, I.P. Lough. Statement of total recognised gains and losses For the year ended 31st March m m Profit attributable to shareholders of Pilkington plc Other recognised losses: Exchange rate movements on foreign currency net investments (36) (33) Total recognised gains relating to the year Pilkington plc annual review

40 Reconciliation of movement in shareholders funds For the year ended 31st March m m Profit attributable to shareholders of Pilkington plc Dividends (63) (63) Exchange rate movements on foreign currency net investments (36) (33) Goodwill written back 4 Shares issued 7 3 Premium on shares issued 3 2 Net decrease in shareholders funds for the year (7) (23) Shareholders funds at beginning of the year Shareholders funds at end of the year Summary group cash flow statement For the year ended 31st March m m Net cash inflow from operating activities (note 6) Dividends received from joint ventures and associates 8 24 Net cash outflow from returns on investments and servicing of finance (26) (73) Taxation paid (48) (22) Net cash outflow from capital expenditure (104) (161) 207* 135* Net cash inflow from acquisitions and disposals 33 3 Net cash inflow before dividends, management of liquid resources and financing Equity dividends paid by parent company (54) (58) Net cash inflow before use of liquid resources and financing Management of liquid resources (23) (20) Net cash outflow from financing (161) (74) Increase/(decrease) in cash 2 (14) *Free cash flow Reconciliation of net cash flow to movement in net debt For the year ended 31st March m m Net debt at beginning of the year (861) (704) Increase/(decrease) in cash in the year 2 (14) Cash inflow from management of liquid resources Net decrease/(increase) in loans 151 (144) Net (increase)/decrease in obligations under finance leases (19) 19 Change in composition of the Group 1 Exchange rate adjustments 39 (38) Net debt at end of the year (note 7) (664) (861) 38 Pilkington plc annual review 2004

41 Notes on the summary financial statement 1 ACCOUNTING POLICIES These results have been prepared on the basis of the accounting policies, which have been consistently applied RECONCILIATION TO NON-STATUTORY DISCLOSURES m m (a) Profit before goodwill amortisation, exceptional items and taxation Profit before taxation Goodwill amortisation 8 9 Exceptional items (b) Earnings excluding exceptional items Profit for the year attributable to shareholders Exceptional items after tax and minority interest (c) Earnings excluding goodwill amortisation and exceptional items Profit for the year attributable to shareholders Goodwill amortisation 8 9 Exceptional items after tax and minority interest millions millions Average number of shares for basic earnings per share calculation 1,260 1,248 Average number of shares for fully diluted earnings per share calculation 1,263 1,250 pence pence Adjusted earnings per share excluding exceptional items Adjusted fully diluted earnings per share excluding exceptional items Adjusted earnings per share excluding goodwill amortisation and exceptional items Adjusted fully diluted earnings per share excluding amortisation of goodwill and exceptional items Turnover Operating Turnover Operating 3 CONTINUING OPERATIONS profit/(loss) profit/(loss) m m m m Building products 1, , Automotive products 1, , Group operations and technology management 53 (19) 15 (20) Goodwill amortisation (8) (9) 2, , Segmental analysis with goodwill amortisation analysed to business lines: Building products 1, , Automotive products 1, , Group operations and technology management 53 (19) 15 (20) 2, , Europe 1, , North America Rest of the world Group operations and technology management 53 (19) 15 (20) 2, , Pilkington plc annual review

42 Notes on the summary financial statement continued NET OPERATING ASSETS/(LIABILITIES) OF CONTINUING OPERATIONS m m Building products Automotive products Group operations and technology management 22 (2) Goodwill ,445 1,616 Segmental analysis with goodwill analysed to business lines: Building products Automotive products Group operations and technology management 22 (2) 1,445 1,616 Europe 959 1,065 North America Rest of the world Group operations and technology management 22 (2) 1,445 1,616 5 EXCEPTIONAL ITEMS These comprise losses on the sale and termination of operations of 7 million ( million) primarily arising from the termination of the Automotive Glass Replacement business in New Zealand and losses on the disposal of fixed assets and investments of nil ( million) RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES m m Operating profit Depreciation and amortisation Movements in working capital: Stocks and work in progress 1 32 Debtors 4 7 Creditors 18 (20) Provisions (9) (14) Other items 2 1 Net cash inflow from operating activities before exceptional items Exceptional items termination of operations (8) (2) Net cash inflow from operating activities NET DEBT m m Loans and overdrafts Finance leases Gross borrowings Less cash and marketable investments (92) (75) Net debt Pilkington plc annual review 2004

43 Independent auditors statement to the shareholders of Pilkington plc We have examined the summary financial statement of Pilkington plc. Respective responsibilities of directors and auditors The directors are responsible for preparing the summarised annual review in accordance with applicable law. Our responsibility is to report to you our opinion on the consistency of the summary financial statement within the summarised annual review with the annual financial statements, the directors report and the report on directors remuneration and its compliance with the relevant requirements of section 251 of the United Kingdom Companies Act 1985 and the regulations made thereunder. We also read the other information contained in the summarised annual review and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the summary financial statement. This statement, including the opinion, has been prepared for and only for the company s members as a body in accordance with section 251 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this statement is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. The maintenance and integrity of the Pilkington website is the responsibility of the directors. The work carried out by us does not involve consideration of these matters and, accordingly, we accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Basis of opinion We conducted our work in accordance with Bulletin 1999/6 The auditors statement on the summary financial statement issued by the Auditing Practices Board for use in the United Kingdom. Opinion In our opinion the summary financial statement is consistent with the annual financial statements, the directors report and the report on directors remuneration of Pilkington plc for the year ended 31st March 2004 and complies with the applicable requirements of section 251 of the Companies Act 1985 and the regulations made thereunder. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 26th May 2004 Pilkington plc annual review

44 Shareholder information The summary financial statement does not contain sufficient information to allow as full an understanding of the results and state of affairs of the company and of the Group as would be provided by the full annual report and accounts. If you require more detailed information, you may obtain, free of charge, a copy of the full annual report and accounts from the company s Registrars, Computershare Investor Services PLC, PO Box 82, The Pavilions, Bridgwater Road, Bristol BS99 7NH. Shareholders who receive only the summary financial statement will continue to do so. However, if you would like to receive the full annual report and accounts in future, please write to the company s Registrars. ANNUAL GENERAL MEETING The notice convening the company s annual general meeting at the Pilkington European Technical Centre, Hall Lane, Lathom, Nr Ormskirk, Lancashire on Tuesday 20th July 2004 at am, is contained in a separate document issued to shareholders. Information on the results of voting at this annual general meeting will be published on the company s website and will be available on request from the company secretary. DIVIDEND The directors recommend a final dividend for the year ended 31st March 2004 of 3.25p per share, with scrip alternative, payable on 30th July 2004 to shareholders on the Register on 11th June Shareholders with an existing scrip dividend mandate will, subject as hereinafter provided, automatically receive new shares in lieu of a cash dividend. Scrip dividend mandates are available from the company s Registrars and on the company s website and should be completed and returned to them no later than 13th July Shareholders wishing to cancel an existing scrip mandate should also write to the Registrars before that date. The offer of a scrip dividend is subject to the terms of the Pilkington plc Scrip Dividend Scheme. The scrip dividend share value will be calculated on the basis of the average of the middle market quotations of Pilkington shares on the London Stock Exchange for the five dealing days commencing on 9th June Announcement of results 26th May 2004 Ex-dividend date 9th June 2004 Record date 11th June 2004 Announcement of scrip dividend share value 16th June 2004 Latest return date for scrip dividend mandates or cancellation of existing mandates 13th July 2004 Annual general meeting 20th July 2004 Dividend payment date and first date of dealing in scrip dividend shares 30th July 2004 For the year ending 31st March 2005 Announcement of interim results 3rd November 2004 Interim dividend payment date (to be confirmed) December 2004 PAYMENT OF DIVIDENDS DIRECTLY INTO BANK ACCOUNTS If you currently receive dividends by cheque, you may wish to consider having future dividends paid directly into your bank account. You will benefit from no postal delay, no risk of the cheque being lost and avoid the inconvenience of having to go to the bank or building society. In addition, this will help the company to minimise costs in the future which will benefit all shareholders. You will be sent confirmation of the payment with your tax voucher. Simply complete a mandate form available from the company s Registrars or the form may be downloaded from their website. PAYMENT OF DIVIDENDS TO BANKS OUTSIDE THE UNITED KINGDOM BY TAPS Transcontinental Automated Payment Service (TAPS) is a facility which is available for regular payments from the UK to certain countries overseas. If you are a private shareholder with a registered overseas address and your dividend is normally between 5 and 5,000 you may be able to receive your dividends using TAPS. A dividend is automatically converted on the first working day after the dividend payment date to the relevant country s domestic currency and can then be forwarded direct to your bank account in that country. The cost of this service is currently 2.50 per payment which will be deducted from your dividend payment prior to conversion. If you would like to receive your dividend using this service please contact the company s Registrars for full details. The exchange rates will be published on the company s website within five working days of the dividend payment date. CONSOLIDATED TAX VOUCHERS In an effort to streamline processes and to assist shareholders with record keeping, the company will in future issue Consolidated Tax Vouchers for those shareholders who elect to have their dividends paid direct to their bank or building society account. This will avoid the necessity of issuing a tax voucher with each dividend payment. Instead, one tax voucher will be issued each year at the same time the interim dividend is paid, normally in December. This will contain the taxation details of all dividends for that particular financial year which will be of assistance to you if you are required to complete a tax return. If you have any queries regarding this arrangement please contact the company s Registrars. ELECTRONIC COMMUNICATIONS Shareholders now have the opportunity to access shareholder documents, such as Notice of Meetings, Forms of Proxy, Report and Accounts and the Annual Review and Summary Financial Statement, electronically via the Internet, rather than receiving them by post. If you choose this option, you will receive a notification by each time the company publishes shareholder documents on its website. The will provide information enabling you to access, read and download the documents at your leisure. Use of electronic communications enables shareholders to access timely information and is also more environmentally responsible by helping to reduce the expense of printing and posting the documents mentioned above. 42 Pilkington plc annual review 2004

45 If you elect to receive shareholder documents in electronic form you will be able to change your instruction or request a paper copy at any time. To receive documents electronically, you will need to register online at and then select Pilkington plc. Full details of how to register are provided on-screen. You will need your Shareholder Reference Number available when you first log in (located on the enclosed Form of Proxy, your share certificates or the tax voucher accompanying your most recent dividend). The use of electronic communications is entirely voluntary. If you wish to continue receiving communications from the company by post in the traditional manner then you need take no action. ONLINE VOTING ON AGM RESOLUTIONS You can vote online at from 9.00 am on 18th June 2004 until am on 18th July You will need your Shareholder Reference Number and unique PIN number provided on your Form of Proxy for security verification. CREATE A PORTFOLIO WITH INVESTOR CENTRE Investor Centre is a free portfolio management system operated by the company s Registrars, which will enable you to view details of all your shareholdings that the Registrars administer. You are able to add other shareholdings to the portfolio. The portfolio shows the current market value of your shareholding (prices are normally only 20 minutes delayed). In addition, you can view price histories and trading graphs for all companies listed on the London Stock Exchange, and keep up to date with market news. If you wish to use this service, register free with Investor Centre at by clicking Register now. You will need to have available your Shareholder Reference Number. Please telephone for Investor Centre enquiries. SHARE DEALING SERVICE The company s Registrars, Computershare Investor Services PLC, has in place a share dealing service for Pilkington shares. For further information please telephone or log on to SHAREGIFT The Orr Mackintosh Foundation operates a charity share donation scheme for shareholders with small parcels of shares whose value makes it uneconomical to sell them. Details of the scheme are available from the company secretary or on the ShareGift internet site, AMALGAMATING YOUR SHAREHOLDING If you receive duplicate mailings, it may be because we have more than one shareholding in your name. To ensure that your shares are registered correctly and amalgamated into one account, please contact the Registrars on REGISTER FOR ALERT SERVICE If you wish to register for Alert Service go to and Select Investor Relations, then Alert Service Enter your address Choose what you want to receive. You can unsubscribe from this service at any time. UNSOLICITED MAIL The law obliges the company to make its register of members available to other organisations. Because of this, you may receive mail you have not asked for. If you wish to limit the amount of personally addressed unsolicited mail you receive, please write for information and an application form to the Mailing Preference Service, Freepost 22, London W1E 4EZ or visit their website Pilkington plc annual review

46 Shareholder contacts Contact Address Telephone Facsimile Website REGISTRARS Computershare PO Box 82 Shareholder Investor Services PLC The Pavilions enquiries computershare. Bridgwater Road co.uk Bristol BS99 7NH Share dealing *Textphone PILKINGTON plc David Roycroft Pilkington plc Head of Corporate Affairs Prescot Road or pilkington.com and Investor Relations St Helens WA10 3TT John McKenna Company Secretary pilkington.com Sheila Lennon Assistant Company Secretary pilkington.com FINSBURY GROUP (Financial PR advisers) Charlotte Hepburne-Scott Tabernacle St charlotte.hepburne London EC2A 4NJ *The Registrars can be contacted by Textphone which allows speech and hearing impaired people who have access to a Textphone to contact Computershare direct without the need for an intermediate operator. Specially trained operators are available during normal business hours. 44 Pilkington plc annual review 2004

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48 Head Office and Registered Office Prescot Road St Helens WA10 3TT Telephone: Fax: Company Number 41495