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ANNUAL REVIEW 2003

Glass for the world’s buildings and vehicles

GLASS FOR THE WORLD’S BUILDINGS AND VEHICLES

OUR BUSINESS

Pilkington plc is one of the world’s largest manufacturers of glass and glazing products for thebuilding and automotive markets. Employing 25,200people we have manufacturing operations in 24countries 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 operationsare increasingly global.

Geographically, over half our sales are in Europe, more than 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 glazingsystems to the original equipment and replacement glazing markets.

PILKINGTON PLC REVIEW 2003 1

FINANCIAL HIGHLIGHTS

• Robust results, in challenging markets

• Operating profit of £217 million (2002: £238 million)

• Profit before goodwill amortisation, exceptional items and taxation of £153 million(2002: £183 million)

• Cash inflow before dividends of £138 million (2002: £5 million outflow); strongest cash performance for a decade

• North American ‘Step Change’ showing through in results; efficiency and productivityimprovements on track to deliver $35 million in annual benefits by March 2004

• Earnings per share before exceptional items of 5.8 pence (2002: 6.8 pence), basic earnings per share of 5.4 pence (2002: 6.0 pence)

• Final dividend 3.25 pence, maintaining 5.0 pence in total for the full year.

Turnover(including shareof joint venturesand associates)£ MILLION

Operating profit(including shareof joint venturesand associates)£ MILLION

Profit before goodwillamortisation,exceptional itemsand tax£ MILLION

Cash flowfrom operations

£ MILLION

Cash flow beforedividends, use ofliquid resourcesand financing£ MILLION

2,7

07

2,8

20

2,8

05

2,7

54

20

00

20

01

20

02

20

03

123

249

238

217

20

00

20

01

20

02

20

03

67

183

183

153

20

00

20

01

20

02

20

03

271

321

262

367

20

00

20

01

20

02

20

03

64

6

-5

138

20

00

20

01

20

02

20

03

Non-statutory disclosures are reconciled to the statutory disclosures in note 2 to the Summary Financial Statement on page 39.

2 PILKINGTON PLC REVIEW 2003

CHAIRMAN’S STATEMENT

I am pleased to report a robust set of results from Pilkington,produced against the backdrop of continuing depressed tradingconditions in most of the Group’s major markets. Pressure on selling prices in Europe and North America pulled operating profits,including joint ventures and associates, down to £217 million (2002 £238 million). Despite the lower operating profits, ouremphasis on cash generation enabled Pilkington to generate cashinflow before dividends of £138 million (2002 £5 million outflow),the Group’s strongest cash performance for a decade.

These results demonstrate Pilkington’s resilience and provide further

evidence of the transformation of the Group into one of the most efficient

and innovative glass producers in the world. The step change in performance

achieved over the past few years has enabled Pilkington to regain its

position as an industry leader in operational performance, through its focus

on improving efficiency and minimising overheads, to match its continuing

technological leadership.

Further progress has been made in improving the Group’s productivity

levels and in reducing overhead costs. Trading performance in the UK

has been strong, helped by rising sales of Pilkington K Glass™ resulting

from legislative changes requiring the use of energy-saving glass. The

Automotive business continues to consolidate its position as supplier of

choice of glass and glazing systems for the world’s carmakers and has

won profitable new business. Furthermore, the restructuring ‘Step Change’

programme in North America is continuing to provide positive results,

and is on track to deliver annual benefits of $35 million by March 2004.

FINANCIAL RESULTS

As announced at the presentation of the Group’s annual results for

the year to 31st March 2002, Pilkington has changed its treatment of

redundancy and restructuring costs such that these items are no longer

disclosed separately as an exceptional component of operating profit. Given

the regular nature and amounts of redundancy and restructuring costs, the

board considers the revised disclosures set out in the profit and loss account

and in the notes to the financial statements to be more appropriate. Further

details of the re-presentation are included in note 1 to the financial statements.

Turnover from continuing operations, including joint ventures and

associates, was unchanged at £2.8 billion. Operating profit, including

joint ventures and associates, was £217 million (2002 £238 million).

Profit before goodwill amortisation, exceptional items and taxation

was £153 million (2002 £183 million), a decrease of 16 per cent.

After deducting goodwill amortisation of £9 million (2002 £10

million), and exceptional losses arising from the disposal of businesses

and investments of £4 million, profit before tax was £140 million

(2002 £161 million).

Following the collapse of the Argentinean peso in 2002, hyperinflationary

conditions prevail in Argentina and, as a result, Pilkington has adopted the

indexation rules set out under UITF 9 in preparing the Group’s results.

This has had the effect of reducing the Group’s operating profit in 2003 by

£6 million, compared to that computed under historical accounting rules.

Earnings and dividendsEarnings per share before exceptional items decreased from 6.8 pence

to 5.8 pence. Basic earnings per share have decreased from 6.0 pence

to 5.4 pence, a reduction of ten per cent. 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 more than twice

covered by cash flow. Subject to the approval of shareholders at the annual

general meeting, the final dividend will be paid on 1st August 2003 to

shareholders on the register at 13th June 2003.

Cash flow and borrowingsOperating cash flow has improved significantly from £262 million to

£367 million, an increase of 40 per cent, demonstrating our success in

focusing attention on the generation of cash. Cash flow before dividends

also improved, from an outflow of £5 million in 2002 to an inflow of

£138 million in 2003. After payment of £58 million for dividends,

the net cash inflow before financing for the year was £80 million.

Net borrowings at 31st March 2003 were £861 million, increased from

£704 million at 31st March 2002, principally because of the scheduled

redemption of £216 million of minority preference shares and their

replacement with bank borrowings. Taking into account the preference

shares with net borrowings at 31st March 2002, debt has reduced by

£59 million over the course of the year.

SIR NIGEL RUDD


STRATEGY

Competitiveness in the manufacture of flat glass remains central to

our strategy and we will continue to seek every opportunity to reduce

overheads and improve manufacturing efficiency, whilst maintaining

the highest levels of safety and quality in everything we do. The North

American restructuring programme, which is now drawing to a close, is

a good example of this. Generating increased cash as a basis for future

profitable growth remains a key objective.

The Group continues to benefit from a progressive shift toward higher

value-added products in both building products and automotive markets.

In Building Products, usage of energy-saving Pilkington K Glass™

has increased significantly in the UK, following changes in building

regulations. Sales of advanced fire protection products continue to grow.

The uptake of Pilkington Activ™ self-cleaning glass, now available in all

our principal markets, is rising steadily, despite its launch in an economic

downturn. We intend to make this revolutionary product a platform for

the launch of a range of multi-functional glasses combining dual-action

self-cleaning with other properties.

During the year Pilkington began the supply of the first enhanced

intruder resistant laminated sideglazing on the BMW 7 series, and

began to supply Chrysler in North America after a gap of ten years.

THE BOARD

The changes to our management structure, which we announced on

14th May 2002, have taken place with Stuart Chambers becoming group

chief executive, Pat Zito becoming an executive director and Warren

Knowlton leaving the Group. In December 2002 Paolo Scaroni informed

the board that, due to increased time commitments, he would no longer

be able to fulfil the role of non-executive deputy chairman and his

resignation was made with effect from 10th December 2002.

Dr. Hans-Peter Keitel will retire as a non-executive director after the

annual general meeting in July. Hans-Peter has been a non-executive

director since September 1995 and the board has benefited greatly from

his experience, particularly in matters relating to the German market,

emerging markets, capital expenditure projects and the construction industry.

I take this opportunity to thank him for his contribution and support.

Andrew Robb will also retire as an executive director after the annual

general meeting in July. Andrew joined the board in December 1989,

and since then has made a significant contribution to the Group. He was

finance director until the end of December 2001 and subsequently has

been active in continuing to develop the Group’s strategic relationships

whilst remaining responsible for the legal, secretarial, corporate affairs and

information systems functions. I wish him every happiness in retirement.

I am pleased to announce that Christine Morin-Postel has accepted the

board’s invitation to become a non-executive director and will take up this

appointment on 1st August 2003. Christine recently retired as executive

vice-president in charge of group human resources at Suez, a major French

company, and prior to undertaking such role was chief executive officer of

Société Générale de Belgique. The board believes that it will benefit

greatly from her knowledge of continental European markets and from

her experience in general management and human resources.

EMPLOYEES

Productivity has increased substantially over the past six years. One

consequence of this has been to place greater responsibility on to a smaller

number of managers and staff. The Group considers the development of

individuals and employee training programmes as being critical to our

success, and continues to emphasise the importance of safety and quality

in everything we do.

PROSPECTS

Pilkington is operating in tough trading conditions for a third

consecutive year and we currently expect little change in the near term.

Pilkington will continue to concentrate on reducing overhead and further

improving manufacturing performance so as to deliver robust profits, even

in difficult markets. Furthermore, we will remain focused on the need to

generate net free cash flow to secure the future.

‘These results, achieved in some of the toughest trading conditions for many years, demonstrate the Group’s resilience and provide furtherevidence of the transformation of Pilkington into one of the mostefficient, as well as the most innovative, glass producers in the world.The emphasis on cash generation has enabled the Group to generatecash flow before dividends of £138 million, Pilkington’s strongest cashperformance for a decade.’


GLASS – A GROWTH INDUSTRY

GLOBAL DEMAND FOR FLAT GLASS

Whilst 2003 is expected to offer a modest growth in basicvolume, over the long-term, glass demand is still growing atover 3.5 per cent annually.

This growth is fuelled by the demand for building glass and automotive glass, which in turn are driven by economic growth.

Glass is a growth industry. Global demand for glassconsistently 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 andnow the world standard for high quality glass production.

IND

EX

(1

99

1 =

10

0)

Calendar year

50

1991 1994 1997 2000 2003

100

150

Growth in global glass demand has outpaced GDP growth since 1991

GLOBAL GLASS DEMAND: 3.5% p.a.

REAL GDP: 2.4% p.a.

Global light vehicle build

MIL

LIO

N V

EH

ICLE

S

40 1997 1999 2001 2002

45

50

55


GLASS GROWTH IN BUILDINGS

Glass is an integral building material for most construction projects. Both new building projects and the refurbishment of existingbuildings call for large quantities of glass products. Architects seek to maximise natural daylight in buildings. This is achieved through larger glazed areas in façades and roofs and through entirely glazedstructural façades.

Building refurbishment accounts for around 40 per cent of glassconsumption worldwide. In mature markets, windows in residentialbuildings are replaced every ten to 20 years.

Energy saving has encouraged tougher legislation, making insulated glazingunits mandatory in most of Europe. Many countries also have regulationsrequiring energy efficient coated glasses. Demand is growing for glass that promotes safety, resists fire, attenuates noise and even cleans itself.

GLASS GROWTH IN VEHICLES

Styling trends are increasing the overall glazed area in vehicles. Today,many volume models use around 20 per cent more glass than they did 20 years ago. Laminated sidelights are the latest product to contributesignificantly to enhance the sales value of side glazings.

Demand has grown for value-added content such as:• solar control properties, reducing solar heat gain;• heated glazings with de-icing and de-misting capabilities;• integrated antennas; • integrated rain sensors for automatic wiper activation;• hydrophobic coatings for improved visibility.

Value-added activity includes the supply of complete systems usingencapsulation or extrusion, which enhance the vehicle’s styling and aerodynamics, as well as adding functionality.

A LEADER IN THE WORLD’S GLASS INDUSTRY

Pilkington is the world’s secondlargest float glass group, with 15%of world capacity (19% includingjoint ventures and associates).Specialising exclusively in glass,Pilkington is one of only twocompanies in the glass industry with a truly global presence. It isalso one of only three glass groupswith global automotive glazingcapability and reach.

With its associates and strategicpartner NSG, Pilkington is theworld’s number one supplier of glass and glazing systems to theworld’s automotive industry. Around one in four light vehiclesbuilt in 2002 in the world containedPilkington glass. Pilkington is theworld leader in Automotive GlassReplacement (AGR).

Today’s architects and car designers are using larger surface areas of glass in their designs, increasingly with added functionality and complexity.

Float glass capacity of the world's leading float glass manufacturers in 2002

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COMPANY COUNTRY % OF WORLD CAPACITY

Asahi Japan 22Pilkington United Kingdom 15Saint-Gobain France 13Guardian United States 12Others (32 companies) 38


REACHING OUR CUSTOMERS

Most of the glass in the world’s homes, offices, hotels,public and industrial buildings is float glass. Most of the world’s drivers rely on glazing based on float glass, as do civil airline pilots, high-speed train drivers, and bus and truck drivers.

With manufacturing operations in 24 countries and sales in 130, Pilkington sells around 3.5 million tonnes (300 million square metres) of glass every year.

In Building Products and Automotive, we serve both the original equipment and aftermarket sectors with a wide range of glass products and glazing systems.

FLOATMANUFACTURING

BUILDINGPRODUCTS

AUTOMOTIVEPRODUCTS

SECONDARY MARKET SALES REDUCE CYCLICALITY

AEROSPACE 2% AUTOMOTIVE GLASS

REPLACEMENT 16%

BUILDING PRODUCTREFURBISHMENT21%

BUILDING PRODUCT INTERIOR APPLICATIONS11%

BUILDING PRODUCTNEW BUILD

21%

AUTOMOTIVE ORIGINAL EQUIPMENT

29%

PRIMARY : 52% SECONDARY : 48%


TWO STRONG BUSINESS LINES

Pilkington and its joint ventures andassociates have the widest geographic reachof any glassmaker. Over half our sales are in Europe, more than a third are in NorthAmerica, and the rest primarily in SouthAmerica and Australasia.

Encompassing Pilkington’s activity in floatglass manufacture and other processedbuilding glass products, our Building Productsbusiness has manufacturing operations in 19 countries. Its largest operation is inEurope, with major interests in North andSouth America and Australasia.

One of the world’s largest suppliers ofautomotive glazing products, PilkingtonAutomotive has glass-processing operations in 17 countries. It serves the key Europeanand North American markets and also hasimportant operations in South America,Australasia and China.

CONSUMER

NEW BUILDINGS

REFURBISHMENTINSTALLER/

DEALER

OE MANUFACTURER/WHOLESALER/

FITTER

INTERIOR

ORIGINALEQUIPMENT

(OE)

AFTERMARKET

ROUTES TO MARKET

Most Pilkington products are made from Float Glass. In Building Products, basic glass canundergo two or more stages of processing before being installed as original or replacementwindows or glazing systems, or used as a component in furniture or white goods, such ascookers and refrigerators.

Within Automotive, we supply glass used in original equipment for new vehicles for all ofthe world’s leading carmakers and also manufacture and distribute replacement parts for the aftermarket throughout the world.

SALES 2003

AUTOMOTIVE PRODUCTS

BUILDINGPRODUCTS53%

AUTOMOTIVEPRODUCTS

47%

BUILDING PRODUCTS

SOUTH AMERICA8%

AUSTRALASIA10%

EUROPE58%

NORTHAMERICA

24%

SOUTH AMERICA 4%

AUSTRALASIA3%

NORTHAMERICA

44%

EUROPE49%


CHIEF EXECUTIVE’S REVIEW

The first phase was crucial in ensuring that Pilkington was able to

survive and prosper in currently tough but potentially rewarding markets.

This stage is essentially complete; over the past six years, the Group

has significantly improved its cost structure and efficiency to become

leaner and more competitive. Reduced overheads and improvements in

manufacturing have produced a step change in productivity, with most

Pilkington businesses now operating at ‘world class’ levels. These

improvements have enabled the Group to move forward even in the

very challenging trading conditions we have experienced in almost

all our markets over the past few years.

In order to retain the competitive advantage produced by these major

changes, our primary objective is to ensure that Pilkington remains the

most cost-effective manufacturer in our sector. Low costs are fundamental

to success in flat glass manufacturing and we will continue to explore

every possible opportunity to reduce our cost base.

STUART CHAMBERS

Pilkington is a company founded on technological innovation in Flat Glass.Our role is to invest in sustaining this technology and to use it to createvalue for our shareholders. Our main strategic focus is now on generatingcash to finance future expansion and growth.

Pilkington has a clear three-stage strategy – to improve the effectiveness ofthe existing operations, to produce net free cash from those operations andeventually to invest that cash in profitable growth opportunities.


TARGETS

We have set clear and challenging targets for all plants in terms of

productivity, yield and uptime. Very good progress has been made

towards meeting targets in all these areas. Most of the float plants we

operate around the world are now either approaching or exceeding the

target of 1000 tonnes per person per year. At the same time the variety

and complexity of product mix is changing, to meet the demand for

value-added products such as on-line and off-line coated glasses.

In our Automotive business, we measure effectiveness in terms of

man minutes taken to produce each part and the minimisation of defects

(expressed as defective parts per million or PPM). Significant progress

has been made towards meeting all these targets. This is despite the

fact that the complexity of the parts we make for the world’s vehicle

manufacturers is also increasing in terms of increased curvature, glass

functionality and added components. The supply of automotive glazing

and glazing systems is demanding and highly competitive, but Pilkington

has demonstrated that it has the capability and quality standards to

become the supplier of choice in this important sector.

We attach particular importance to safety and quality in all activities.

Improvements have been made in safety levels throughout the business,

although there is always more to be done. All Pilkington employees

receive safety training and appropriate safety equipment. Quality products

and excellent customer service are essential in all our businesses. In

Automotive, the process of achieving certification to ISO TS 16949-2002

is underway with our European Original Equipment (OE) business being

the first to undergo quality audit to the new standard.

Around the world, all but two of our principal businesses are on track

to achieve target profits. The ‘Step Change’ programme is designed to

bring the two currently under-performing businesses, Building Products

and Automotive OE in North America, up to the standards of the rest

of the Group. Significant progress has been made over the past year

in raising the competitiveness of these businesses.

In float manufacture in North America, the targets we set last year for

yield improvements have already been met, and most of our automotive

fabrication plants now exceed our targets for uptime and yield.

Encouraging progress has also been made in reducing overheads

across all of the North American businesses.

Strategically the next step is to convert this progress into cash to

eventually fund profitable growth. The programme over the past six years

to improve fundamentally the operational effectiveness of our business has

required a considerable cash investment. This investment has been justified

by improvements in operational efficiencies. The phase of significant

structural spends is largely complete and our aim now is to ensure that

we deliver the operational and financial benefits from this investment.

Only by achieving that can we invest in profitable growth for the future.

Key performance indicators, management targets and incentives are

firmly aligned to cash generation, with the results already becoming

apparent. This year we are able to report the best cash inflow from

operating activities achieved by Pilkington since the early 1990s.

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. One of our new products, Pilkington Activ™

dual-action self-cleaning glass, is already having an impact in the market.

BUILDING PRODUCTS

Following its successful launch in North America and in Europe,

the product portfolio for Pilkington Activ™ has also been significantly

widened. It has already been installed in a variety of settings including

private homes, apartment buildings, conservatories, swimming pool

enclosures, golf clubs, roof windows, shop windows and car dealership

showrooms. In response to demand for the product in the commercial

sector a range of solar control coatings on Pilkington Activ™ is being

released in mid 2003. This will extend still further the potential

applications into the commercial building market.

During the past year we have introduced a toughenable version of

Pilkington Optitherm™ SN Low E glass and this product is part way

through a phased introduction into the European market place. Our fire

products business enjoys a leading position in technology and continues

The ‘Step Change’ programme is designed tobring our currently under-performing businessesin North America up to the standards of the restof the Group. I am pleased to report significantprogress over the past year in raising theperformance of these businesses.


CHIEF EXECUTIVE’S REVIEW CONTINUED

to reinforce that position. Pilkington Pyrodur Plus™ is a recently introduced

thin clear fire glazing which has both fire and impact resistance and is

proving to be a successful addition to the Pilkington product portfolio.

Investment in state-of-the-art facilities to support our new product

and process R&D programme continues. We have just completed the

installation of a large-scale magnetron sputter coater at our R&D

laboratory at Lathom in the UK. This equipment will support product

and process development for both Building and Automotive Products.

Also nearing completion is a three-year investment programme at

Lathom to equip the Group with a full-scale automotive glass processing

facility to enhance our capabilities in both new product and new model

development. The investment will both accelerate developments 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.

AUTOMOTIVE PRODUCTS

In our Automotive business, a major organisational change has brought

the business line into an integrated global business, encompassing all OE

and Automotive Glass Replacement (AGR) operations throughout the world.

During 2002, we launched the first enhanced intruder resistant

laminated sidelight on the BMW 7 series. This is further evidence of

the growing market for laminated sidelights, which replace the more

traditional toughened parts. As well as improving intruder resistance,

laminated sidelights increase passenger comfort by reducing transmitted

noise and solar heating and can reduce the chance of passenger ejection

from the vehicle in the event of an accident. We expect continued market

growth as consumer awareness of these benefits spreads.

Using our global supply chain capability, we are now locally

supporting manufacture of the Citroën C3 family saloon in Brazil. This

is the same vehicle that was launched in Europe during 2001. We have

expanded our supply chain capability by using satellite plants in support

of the Ford B car (Fiesta) programme. The satellite plants allow us to carry

out finishing and sequencing operations on components before shipment

to the final destination.

Building on our relationship with the DaimlerChrysler Group, we

have this year won significant new business in North America. We are

now supplying windshields for the Jeep Grand Cherokee and will shortly

supply back windows for the Jeep Liberty.

Reduced time-to-market for new vehicles continues to be one of the

major drivers in the automotive sector. We are staying ahead of this

trend by continually improving our in-house computer simulation

‘virtual prototyping’ and physical prototyping facilities.

We continue to see a trend towards complex glass shapes, driven

mainly by styling needs. Pilkington is a market leader in glass shaping

and is well positioned to benefit from these developments. These trends

are reflected in our investment in Automotive, which continues on a

highly focused basis in support of new model introduction programmes

and manufacturing productivity.

An important development in Automotive over the past few months

has been the launch of a new enterprise resource system known as

SABRE which is now live at our Eccleston plant in the UK. The system

covers all processes involved in Automotive from new model introduction

through manufacture to despatch and electronic self-billing. As such, it

is the largest and most complex SAP system so far implemented in the

Pilkington Group. The benefits expected from such significant changes

to the business are wide-ranging. The aim is to roll SABRE out to all

our automotive plants as quickly as possible.

ENGINEERING

Our Engineering function has successfully completed a very busy year

for float plant repairs. Work on lines in Australia and Brazil in 2001/2002

was followed immediately last year by full repairs on one of our float lines

in Gladbeck, Germany and the line in Venice, with a reduced scope repair

on the Ottawa line in the USA. All lines have now ramped up to full post-

repair production capacity, and the predicted cost reductions due to

enhanced automation have been realised.

Construction of the fourth float line in Brazil, to be operated by

We intend to retain our position as thetechnological leader in the Flat Glass industryand we continue to invest in sustaining ournew products and new processes.


Cebrace, our joint venture with Saint-Gobain, is advancing well.

The building is almost complete, and work to install the float process

equipment has begun. The construction programme was extended to bring

the new capacity on stream in line with the anticipated market demand,

and no problems are foreseen in achieving the new target dates and costs.

Start-up is planned for the second half of 2004.

LOOKING AHEAD

As I complete my first year as Group Chief Executive and consider our

prospects, I am left with two strong impressions. First, I retain a very

optimistic view of Pilkington and our ability to succeed. We have a

highly motivated and well-trained workforce, world leading technology

and an innovative product portfolio. Our manufacturing performance

continues to improve and we have demonstrated that we can deliver

respectable results under some of the most challenging market conditions

experienced for many years.

Secondly, we operate in a strong industry with a bright future.

Glass usage in civil construction and automotive increases year on year

as architects and car designers incorporate more glass into their buildings

and vehicles. Most of our products have a beneficial impact on the

environment by helping to save energy, at a time when legislators around

the world are increasingly recognising and acting upon the urgent need

to address issues of energy consumption, particularly in buildings.

Throughout its history, Pilkington has led innovation in the glass

industry, including the invention and exploitation of the float glass process

and the introduction and exploitation of new products. In Automotive,

Pilkington is recognised as a strong partner in a fast-moving industry that

is constantly pushing forward technical boundaries in the search for new

functionality and competitive differentiation. It is our clear intention to

retain our competitive edge in supplying both industries and to

ensure that our technology stays ahead of the game.

Pilkington is well positioned to benefit from a progressive shift

toward higher value-added products in both building products and

automotive markets. We have seen increased usage of energy saving

Pilkington K Glass™ in the UK, while sales of advanced fire protection

products continue to increase in importance. Despite being launched in

an economic downturn, uptake of Pilkington Activ™ is steadily rising

and we remain optimistic about the long-term prospects for this

exciting product.

We expect the year ahead to see little fundamental change in market

conditions worldwide. Our aim will be to continue to focus on internal

efficiency improvements and to ensure that the business is managed

very tightly. This will be accompanied by sustained effort on our

North American improvements and the completion of the ‘Step Change’

programme, the full benefits of which are expected to come through

in the financial year 2004. Above all, our continued emphasis on net

free cash generation will restore the financial strength we need to

invest in profitable growth, ensuring that Pilkington remains a world

leader in glass.

Over the past year, major organisational changehas brought our Automotive business line into an integrated global business, encompassing allOE and AGR operations throughout the world.


Pilkington products help keep buildings warm in winter, cool in summer, safe, secure and with reduced noise penetration. Pilkington glass can stunningly transform the exterior and interior of buildings, provide protection from fire and smoke, and now even clean itself!

SELF-CLEANING GLASS

Pilkington Activ™ self-cleaning glass is the latest example of technologicalinnovation from Pilkington. Incorporating a proprietary dual-action coating on theglass, it virtually eliminates the need forexternal window cleaning.

SAFETY

Glass that is used to reduce a risk ofaccident by impact, fracture or shattering.Pilkington toughened safety glass andPilkington laminated safety glass provide a huge range of performance levels.

ENERGY MANAGEMENT

Coated and tinted products and insulatingglazing units are used to control the flow ofenergy into and out of a building. During coldweather low emissivity (low-e) products reflect heat back into the building. In warmweather solar control products dramaticallyreduce the effect of the sun’s heat, minimising the need for air-conditioning.

DECORATIVE GLASS

The Pilkington Texture Glass™range is continually updated tointroduce new and excitingpatterns which provide bothdecoration and privacy.

review of operations

BUILDING PRODUCTS

CONSERVATORY PHOTOGRAPH David Salisbury Conservatories


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.

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 PilkingtonPyrostop™ use a proprietary clear interlayer technology.

SECURITY

By using thicker and larger numbers of glasssheets in laminated form, Pilkington securityglass offers even higher levels of protection from bullet-proof to blast-resistant products.

NOISE CONTROL

Glass products that allow people to live and work in peace and quiet.Pilkington Optiphon™ L is a laminateusing a special interlayer, whichattenuates noise by 36 decibels.



BUILDING PRODUCTS

Building Products’ sales, including joint ventures and associates,were £1,452 million, down one per cent on the previous year.Operating profits decreased by 22 per cent to £163 million, due to lower selling prices in continental Europe and North America.

The Group’s Building Products business continues to be a world leader.

This year, however, Pilkington has faced downward pressure on prices in

the weak continental European market and in North America. In the UK

government legislation requiring the use of energy efficient glass in homes

and offices helped keep demand buoyant. In Australia strong demand for

new housing underpinned a good result for the year. Increased efficiencies

and improved productivity helped the business to offset in part the worst

effect of the downturn in continental Europe and North America.

EUROPE

Primary Products Europe is Pilkington’s largest single business and

represents the ‘upstream’ segment of Building Products’ European

operations. Sales in this business were lower than the record levels

achieved last year. This was due to a slowdown in continental European

economies coupled with scheduled cold repairs of two float lines during

the year. European float glass prices fell by an average of ten per cent.

Despite the tough market conditions, the business again made significant

progress, further reducing costs.

One of the two float glass lines at Gladbeck, Germany was repaired

and upgraded during the first quarter. Due to low levels of demand,

the plant start-up was delayed until July 2002. The float plant at Porto

Marghera (Venice), Italy was also repaired and recommenced production

in August 2002.

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 continued strong growth in demand for this product.

Growth for low emissivity Pilkington K Glass™ was boosted in the

UK as a result of revised building regulations introduced by the British

government in April 2002. These regulations, designed to reduce heat loss

and thus improve energy consumption, effectively require the use of low

emissivity glass for windows for both new build and refurbishment. This

brings the UK in line with building regulations which have applied

in Germany and Scandinavia for some years. To meet the increase in

demand for Pilkington K Glass™, investment was made to upgrade

and increase the output from the Cowley Hill coating line in St Helens.

The new innovative self-cleaning glass, Pilkington Activ™, has now

been fully launched throughout Europe and was a major attraction at the

2002 Glasstec Exhibition in Düsseldorf. A marketing campaign is now

in place in all European markets to expand the sales of this exciting

product, with some progress already achieved.

Although the European downstream processing and merchanting

business was also affected by the poor economic conditions in

continental Europe, it was still able to deliver a fifth consecutive year

of profitable growth. This business represents nearly 30 per cent of

total Building Products’ sales.

A steady improvement in productivity during the year, through

the use of better working practices, together with the introduction of

new information systems, resulted in lower overhead costs. Improved

quality and service remain key drivers in the business strategy.

During the year, a small acquisition was made in Finland and

certain branches within the European network were expanded and

productivity increased.

All processing and merchanting customers in Europe can now

place orders online. Twenty per cent of all orders are now processed

electronically and this is expected to grow substantially.

NORTH AMERICA

The North American Building Products business, which accounts

for about 15 per cent of Building Products’ global sales, was affected

by a decline in the US economy. The commercial building market in

particular felt the impact of the slowing economy.

Despite the gloomy backdrop, sales volumes still exceeded the

previous year. Nevertheless, the volatility of energy prices, additional

restructuring costs, and the absence of a key float line due to repair

during the year combined to lower profits.

A reorganisation of this business was completed in January 2003

which has reduced costs significantly, and improvement in manufacturing

RESEARCH AND DEVELOPMENTResearch scientists at the Group’s European Technical Centre analyse thebulk chemical composition of glass. Trace elements are determined to partsper billion levels using an atomic absorption spectrometer. This level ofprecise measurement, plus exact surface analysis, allows Pilkington tomonitor and measure the raw materials of glass and the composition ofultra thin coatings applied to the glass surface.


performance is already coming through. The outlook, should the

economy turn more positive following the Iraq war, is more encouraging.

In Mexico, Vitro Plan SA de CV (VVP), in which Pilkington has

a 35 per cent interest, increased its sales by five per cent, although

operating profits were reduced due to increased competitive pressure

in Mexico and to the slowdown in North American construction.

SOUTH AMERICA

South American Building Products, with operations in Brazil, Argentina

and Chile, accounts for about six per cent of Building Products’ sales.

Much of the region was affected by recession during the year with

Argentina suffering both hyperinflation and further falls in the external

value of the peso. As a result, float sales in Argentina dropped by

20 per cent compared to last year with the construction industry

severely depressed.

The Brazilian economy was flat during the year, although the

Brazilian real suffered a major depreciation. Despite this, the Brazilian

float glass market grew by three per cent in the year with Cebrace, the

joint venture between Pilkington and Saint-Gobain, increasing its market

share. Downstream operations in Brazil suffered pressure on price due

to the currency depreciation, and experienced strong competition from

small, local producers. The start-up of the fourth float line in Brazil,

to be operated by Cebrace has been postponed because of economic

conditions in Brazil and the plant is now planned to begin production

next year.

In Chile, the building products market grew only slightly during the

year. However, exports grew strongly to compensate. Turnover decreased

by three per cent and operating profits declined by 17 per cent, as a

result of the decline in the value of the peso.

ASIA PACIFIC

Pilkington’s Asia Pacific Building Products business accounts for about

ten per cent of Building Products’ sales worldwide. In Australia and New

Zealand, the strong residential housing market provided high demand for

glass throughout the year. Coupled with ongoing manufacturing efficiency

improvements, this enabled the Australasian Building Products business to

return good profits for the year.

In Australia, changes to building regulations to improve energy

efficiency (solar control) resulted in a substantial increase in demand for

the Pilkington ComfortPlus™ range of products. Demand for ‘low-iron’

rolled glass, used in solar energy collectors, continued to grow and will

provide an important market opportunity in coming years.

In New Zealand, the refocused Building Products business reported

record profits, with the economy growing by four per cent, on the back of

strong household spending, new house construction and increased exports.

Most Asian economies returned to growth during 2002/2003, led by

an eight per cent increase in gross domestic product in China. As these

economies continue to grow, high performance glass products are proving

increasingly popular at the high end of the construction market. As a result,

record sales of high value-added architectural glass products, imported

into China from other Group operations, were achieved during the year.

Demand in China for both float glass and processed architectural

products remains strong, although prices weakened as competitors’ new

float lines came on-line. Despite this, the Group’s associated manufacturing

company in China, Shanghai Yaohua Pilkington Glass Co Ltd (SYP), in

which Pilkington holds a 19 per cent share, performed well. SYP now

operates three float lines and a growing glass processing business. In

February 2003, SYP began construction of a new architectural glass-

processing factory in Shanghai.

LARGE SCALE MANUFACTUREA float plant, which operates non-stop for a ‘campaign’ of between 11 and 15 years, makes around 6,000 kilometres of glass a year inthicknesses of 0.4mm to 25mm and in widths up to three metres. The float process invented by Pilkington in 1952, and now the worldstandard for high quality glass manufacture, is used to produce high quality products for both Building Products and Automotive applications.

EMERGENCY GLAZING SERVICEPilkington Glazing is the UK’s largest network of glazing specialists. Its emergency boarding-up and re-glazing service delivers the fastest response to broken windows and doors. Specialists can be on-site within two hours of the initial call to the Pilkington 24-hour, 365 days-a-yearcontrol centre. This service is available to all domestic and commercialbuildings and is currently used by many of the UK’s leading insurancecompanies and major retailers.



AUTOMOTIVE PRODUCTS

Pilkington products include advanced solar control glass for passengercomfort, glass heating systems to control condensation and icing andsecurity glazing and glazing systems, including encapsulation, extrusion and added components.

RAIN SENSORS

Pilkington has developed a patented sensor,using infra-red rays to detect moisture on thewindshield. It then automatically activates thewindshield wipers at the right speed for thequantity of rain.

SOLAR CONTROL GLAZINGS

Glass that reduces the effects of solar heatbuild-up inside the car.

• Improves passenger comfort• Reduces air conditioning load, thereby

increasing fuel economy• Reduces ultraviolet transmissions,

increasing the life of interior materials.

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, increasingpassenger visibility.


GLASS SUNROOFS

Designers are increasingly specifying large area glass roofs for cars. The parts, termedPanorama roofs, are two or three times the size of traditional sunroofs and increase thefeeling of space and light within the vehicle.

GLASS SHAPING

Glass is bent into shape for vehicle windows.After heating, sag-bending and press-bendingallow the manufacture of complex shapes freefrom wrinkles and other optical defects.

LAMINATED SIDELIGHTS

• Increased comfort: high frequency noise reduction, UV 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 andincreased resistance to object penetration.

GLAZING SYSTEMS

Any components or features added after basic manufacturing to increase value to the customers. Examplesinclude door cassettes or door modules. By encapsulation the window frame or gasket is moulded directly onto the glass in a closed mould process.



AUTOMOTIVE PRODUCTS

Automotive Products’ sales, including joint ventures and associates,were £1,287 million, an increase of one per cent on the previousyear. Operating profits improved by 57 per cent to £74 million due to higher sales volume, improved operating efficiency and loweroverheads in North America, and to lower restructuring charges.

Automotive operations have been combined into an integrated worldwide

business unit, across all regions and distribution channels. Coupled

with the restructuring activities in North America which are now largely

complete, this will stimulate the on-going drive for improved operating

efficiencies, reduced overheads and higher profitability. By integrating the

entire supply chain, the business is better able to serve global and regional

customers, reduce stock levels and facilitate the sharing of best practice,

significantly improving operating performance and cash generation.

EUROPE

The economic downturn in continental Europe continued to affect

the business, as light vehicle production remained at the reduced level

of 2002. However, sales in the European Automotive business, which

accounts for approximately 50 per cent of the Group’s Automotive

sales, increased by eight per cent. This was due to gains on new model

introductions and increased demand for specialised applications from

the bus, coach and truck markets.

Increased product complexity is an important factor in the Original

Equipment (OE) market as sales of solar reflective windshield glass,

intruder-resistant side glazing and heated wired products continued

to rise. 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.

In the Automotive Glass Replacement (AGR) business, demand

held up well, except in Germany where general economic conditions

reduced market activity.

The value of the aftermarket continues to grow in line with the

growth 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, the Group’s

manufacturing plants benefit accordingly. Operations in Germany and

France are benefiting from the reconfiguration of warehouse and logistic

operations, improved service levels and extended range availability.

NORTH AMERICA

The North American Automotive business, which accounts for 40 per cent

of the total business, showed significant operational improvements during

the year as a result of the completion of the restructuring programme, and

the incorporation of benefits from sharing best practice across all businesses.

OE sales in North America declined from the previous year, despite

light vehicle production increasing by six per cent, due to the completion

of a large short-term contract with Ford. Sales in the AGR business also

declined from the previous year as the overall market fell by over five

per cent.

However, profitability of both businesses improved as increased

efficiencies, improved quality levels and the greater use of e-business,

largely driven by the recent restucturing programmes, continued to lower

costs. The North American business infrastructure is now much stronger

and it is well positioned to take advantage of any improvements in

economic conditions.

In Mexico VVP’s turnover in its automotive operations declined about

four per cent, though operating profits increased by more than 30 per cent.

SOUTH AMERICA

Pilkington’s South American Automotive business represents five per cent

of the Group’s Automotive operations worldwide. South American vehicle

production fell by eight per cent as economic uncertainty weakened both

the OE and AGR markets. Despite this, high productivity and improved

plant performance provided results in line with last year. Production yields

were also improved at all sites, particularly Caçapava, in Brazil.

EARLY DESIGN INVOLVEMENTPilkington is recognised as a global leader in the development of computer simulation for advanced automotive glazing technology, providingcustomers with the best possible glazing solutions with which to achievetheir styling intent. The Group’s computer modelling techniques predict the optical properties of a particular shape of windshield, how closely anyof the bending processes will achieve the required shape and tolerances,and how difficult manufacturing challenges can be overcome.


ASIA PACIFIC

Results in Australia showed an improvement over last year, reflecting

efficiency gains and a more favourable trading environment.

The new Australian-built Toyota Camry is being exported to the Middle

East. Mitsubishi export sales to North America tapered off during the year

but the Group was able to win the contract to supply the all-new Mitsubishi

replacement model for 2005/2006, despite aggressive competition from

suppliers in Indonesia and Thailand. Profitability continued to rise, driven

by strong automotive sales volumes and improved manufacturing

performance and efficiencies.

The Chinese automotive market grew by 35 per cent in 2002 and is

set to continue this pace of growth in 2003. The Group is well positioned

to service this growing market with our automotive glass subsidiaries and

associates providing wide geographical coverage across China. Sales and

profits increased over the previous year and the businesses are benefiting

from increased integration into the Group global automotive organisation.

Pilkington retains its position as the number one international

automotive glass manufacturer in China.

PILKINGTON AEROSPACE

Pilkington Aerospace increased its market share of military aircraft

transparencies during the year. This increase helped offset the

continuing sales decline in the civil sector, as the commercial aircraft

industry remained depressed following the aftermath of the 11th

September 2001 terrorist attacks and the lead-up to the war in Iraq.

Operating profits improved by approximately 40 per cent despite

lower sales. The improvement was due to continuing efficiency

improvements and further overhead cost reductions.

Several new product development milestones were achieved during

the year. These included the start-up supply of the Joint Strike Fighter

(JSF) canopy as well as windshields for the Saab Gripen high

performance fighter aircraft and the Learjet 45 model business jet.

Progress was also made in the Bullet Resistant Glass (BRG) sector as

sales to automotive OE manufacturers, including Bentley, were achieved.

ORIGINAL EQUIPMENT SUPPLYPilkington is continuously investing in facilities that will improve delivery of service to its Automotive customers. Through the introduction of satelliteoperations Pilkington is able to get closer to its customers. The next logicalstep will see Pilkington able to fit parts to the vehicles on the assembly lineitself. Providing just-in-time and sequenced delivery helps to reduce stocksand transport risks, providing flexibility and real-time reaction to meetcustomers’ needs.

AFTERMARKET SERVICEAGR North America, which supplies automotive glass replacementprofessionals throughout the USA, offers its customers an internet-enabled customer value programme called e-business solutions.The system allows users to process business transactions includingelectronic ordering and invoicing, EDI and also provides businesstraining. In 2003, 35 per cent of AGR North America’s transactionswere processed electronically.


RESULTS FOR THE YEAR

TurnoverDespite the low level of demand in most of our main markets in 2003,

Pilkington sales held up well. Total turnover fell only because of the effect

of exchange rate movements on sales denominated in foreign currencies.

2003 2002

£m £m

Turnover

Group companies 2,414 2,471

Joint ventures and associates 340 334

Total turnover 2,754 2,805

Operating profit

Group companies 175 189

Joint ventures and associates 42 49

Total operating profit 217 238

Exceptional items (4) (12)

Net interest payable (73) (65)

Profit before taxation 140 161

Taxation (49) (61)

Profit after taxation 91 100

Minority interests (23) (26)

Profit attributable to shareholders 68 74

Dividends (63) (62)

Retained profit of the Group 5 12

EPS (excluding exceptional items) 5.8p 6.8p

EPS (including exceptional items) 5.4p 6.0p

Profit before taxation, exceptional items andamortisation of goodwill 153 183

Operating profitAs explained in the interim report, the accounting treatment of ongoing

redundancy and restructuring costs has been revised so that these costs are

no longer treated as exceptional but are now included in normal operating

profit. The figures for 2002 have been re-presented to provide a consistent

comparison. Now that the major ‘Step Change’ programmes are drawing to

a close, future charges for redundancy and restructuring will be lower than

in recent years and are expected to run at between one and one and a half

per cent of turnover.

Total operating profit of £217 million for 2003 was £21 million,

nine per cent down on the previous year. Difficult trading conditions

for Building Products in continental Europe led to reductions in float

glass selling prices of around ten per cent on average. Together with

the slowdown in the commercial construction market in North America,

these were the principal factors behind the reduction in operating profit

of Group companies from £189 million to £175 million. Operating

profits in Building Products fell from £172 million in 2002 to £132

million. However, Automotive profits rose from £36 million in 2002 to

£63 million due to higher sales volumes, improved operating efficiencies,

lower overhead costs (particularly in North America) and reduced

expenditure on restructuring.

Pilkington’s share of joint ventures and associates’ operating profit

fell from £49 million to £42 million, following a tough year at Vitro

Plan SA de CV (VVP), our 35 per cent owned associate in Mexico.

Changes in exchange rate movements reduced the sterling equivalent

of operating profits earned in foreign currencies by £2 million.

The detailed composition of the result, by geographic area and

business line, can be seen in note 3 of the Summary Financial Statement.

Exceptional itemsExceptional items comprise losses of £4 million on the disposal of

businesses and the sale of investments, the most significant being the loss

on disposal of our ten per cent shareholding in Egyptian Glass Company.

Interest payable and similar chargesNet interest payable of £73 million was £8 million higher than the previous

year. Subsidiaries’ net interest charges actually fell by £4 million, due to

lower interest rates generally. Our share of interest costs in joint ventures

and associates increased by £12 million, mainly because of non-cash

exchange losses on translation of the US dollar borrowings in VVP.

IAIN LOUGH

FINANCE DIRECTOR’S REVIEW


Interest costs of Group companies were covered more than three times

by operating profit, and nearly seven times by earnings before interest,

taxation, depreciation and amortisation of goodwill (EBITDA).

TaxationThe tax charge of £49 million comprises current tax of £51 million less

deferred tax of £2 million. The tax charge as a percentage of profit before

tax has fallen from 38 to 35 per cent due to a more favourable mix of

profits arising in the territories in which we operate.

Minority interestsProfits attributable to minority interests were £23 million (2002 £26

million), of which £8 million was equity minority interest and £15 million

was non-equity minority interest. Non-equity minority interests represented

dividends on $309 million of preference shares issued by Pilkington

Channel Islands Limited. In March 2003 these shares were redeemed and

replaced with bank loans. As the redemption took place towards the end of

the financial year, the saving in the dividend costs on the preference shares

was quite small. However, in the year to 31st March 2004, interest costs

will rise by the debt servicing costs of this refinanced amount while

minority interests will decrease by approximately £12 million. The net

effect of this refinancing is expected to increase earnings per share in

2004 by approximately 0.3p.

Earnings per shareEarnings per share before exceptional items fell from 6.8p to 5.8p,

while basic earnings per share fell from 6.0p to 5.4p. As already

mentioned, earnings per share before exceptional items now includes

on-going restructuring costs, previously treated as exceptional.

DividendsDividends paid and proposed represent 5.0p per share, unchanged

from 2002. The dividend is covered 1.1 times by attributable earnings

after exceptional items.

CASH FLOWWith large scale restructuring activity tapering off we are now giving

increasing emphasis to cash generation, particularly of free cash flow. This

resulted in a much improved cash flow performance in 2003, summarised

in Table 1. Cash flow before exceptional costs and central items improved

from £115 million to £208 million, due largely to tighter control of

working capital and lower expenditure on redundancies and restructuring

costs, even though operating profits fell and capital expenditure increased

due to the bunching of cold repairs on three float glass plants.

Net cash inflow before management of liquid resources and financing

was £80 million, compared with an outflow of £50 million in 2002. The

improvement arose principally from the higher operating cash flow, increased

dividends from joint ventures and associates, and lower out-goings on tax

payments. These latter two items are expected to revert closer to 2002

levels next year.

FUNDING AND LIQUIDITY

Net debtNet debt of £861 million at the year end comprised gross debt of

£936 million, less cash and marketable investments of £75 million.

At 31st March 2002 net debt equivalent would have been £920 million,

if the minority interest preference shares, which matured in March 2003,

were treated as debt at that time. The main features of the change in net

debt during the year are set out in Table 2.

SOURCES OF FINANCEPilkington 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 1 shows the weighting of each source at 31st March 2003.

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 80 per cent of the total.

Liquidity managementPilkington’s funding policy is to ensure continuity of finance at

reasonable cost, based on committed funding, arranged for a range of

maturities and sources. At 31st March 2003 the average tenor of our

committed borrowings was four years, varying from one to 11 years.

At 31st March 2003, Pilkington had £396 million of unutilised

committed facilities also with an average maturity of four years. The

maturity profile of all our committed facilities is depicted in Chart 2.

Table 1 – Cash flow 2003 2002

£m £m

Operating profit – Group companies 175 189

Add back:

Depreciation 179 176

Amortisation of goodwill 9 10

Earnings before interest, tax, depreciation and goodwill amortisation (EBITDA) 363 375

Movement in working capital 19 (55)

Movement in provisions and other items (13) (51)

Capital expenditure (161) (154)

Cash flow before exceptional costs andcentral items 208 115

Exceptional costs (2) (7)

Dividends received 24 9

Taxation and servicing of finance (95) (117)

Acquisitions and divestments 3 (5)

Net cash inflow/(outflow) before dividends,management of liquid resources and financing 138 (5)

Dividends paid (58) (45)

Net cash inflow/(outflow) before managementof liquid resources and financing 80 (50)

Table 2 – Net debt £m £m

As at 1st April 2002

Pilkington Channel Islands Ltd preference shares 216

Net debt 704

920

Reduced by:

Net cash inflow before management of liquid resources and financing (Table 1) (80)

Issue of share capital (1)

Exchange differences 38

Movement in the year (43)

Exchange difference on redemption of preference shares (16)

Net debt at 31st March 2003 861


FINANCE DIRECTOR’S REVIEW CONTINUED

The financial year 2005 maturities are principally £260 million of

syndicated bank lines, due to mature in December 2004.

Pilkington also has access to substantial uncommitted and short-term

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.

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

basis. The derivatives used for this purpose are principally interest rate

and currency 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. In November

2002, taking account of the difficult trading conditions facing the glass

industry in general, Moody’s downgraded Pilkington’s credit rating

from Baa1 to Baa2, with a negative outlook. Standard & Poor’s retained

Pilkington’s BBB credit rating though the outlook was altered from stable

to negative. Both ratings are still investment grade. The lowering of

the Moody’s rating (and the negative outlook put on the rating by both

agencies) did not affect Pilkington’s cost of borrowing.

Pilkington aims to maintain investment grade credit ratings from both

agencies and the significant improvement demonstrated in our cash flow

should help underpin the ratings.

Shareholders’ fundsShareholders’ funds and minority interests decreased from £792 million

excluding the Pilkington Channel Islands Limited preference shares, to

£781 million. The reduction was principally due to exchange losses on

translation of Mexican and South American assets, partly offset by £5

million of retained profit.

Treasury managementTreasury activities are centralised in the Group head office in St Helens.

Group Treasury is responsible for the provision of liquidity management

for Group operations, 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

counter-parties, noted for their strong credit standing. Treasury operations

are reviewed annually by the Group Internal Audit function to

ensure compliance with Group policies.

Due to the relatively high cost of transporting glass over long

distances, Pilkington’s manufacturing sites are usually located reasonably

close to customers, so glass exports do not generally represent a major

foreign currency exposure. Material foreign exchange transactions are

hedged when confirmed, 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. During the year, South American currencies, where

hedging opportunities are limited, suffered a significant loss of value

against sterling. In Argentina, following the rapid rise in inflation after

the devaluation of the peso at the beginning of 2002, we adopted hyper-

inflation accounting in accordance with UITF 9 – Accounting for

Operations in Hyper-Inflationary Economies.

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 2003, 38 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 on our variable

rate borrowings would be approximately £5 million.

Energy costs comprise around 20 per cent of the factory gate production

cost of glass. The Group operates a hedging programme to minimise the

volatility of energy costs. The majority of our gas requirements in the

United States, where gas prices have been most volatile recently, are

hedged through a managed programme. Energy-related surcharges on

deliveries to customers have become established industry practice.

POST RETIREMENT BENEFITSSeveral 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 39 to the Directors’ Report

and Accounts.

Rising longevity allied with the worldwide fall in stock market values

has significantly raised the profile of company pension obligations. The

Chart 1 - Debt sources

21% Bank loans – syndicated

28% Eurobond

3% Finance leases

39% US private placement

9% Bank loans – bilateral

Chart 2 - Committed facilities: maturity profile

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

>2

01

1

0

100

200

300

400

£m

500


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, where each month the company pays a fixed percentage of

salaries into a pension fund. The UK company pension scheme, which

is by far the biggest in the group, is a hybrid scheme with characteristics

of both defined benefit and defined contribution schemes. A key feature

is that, under the terms of the trust deed, the company contribution is a

fixed percentage of employees’ salaries, paid every year. No pension

‘holiday’ has been taken since the scheme began in the 1960s.

Pilkington does not have right of access to any pension fund surplus,

nor can it be required to make up any deficit, other than that

required by law.

Elsewhere, only ten per cent of the Group’s employees are 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 2003, on an FRS 17

basis, the North American schemes had a total deficit of £89 million.

Company contributions are not made to these schemes at present, nor

are they anticipated in the year to 31st March 2004. The need for

company contributions subsequently will depend on investment

conditions at the time.

The only significant unfunded pension schemes, which are common

in continental Europe, are in Germany and Austria. These schemes 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 2003 was £168 million, a reduction of £11

million from the value at 31st March 2002. 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.

Table 3 summarises the key aspects of the post retirement benefit

schemes at 31st March 2003.

INSURANCE AND RISK MANAGEMENTPilkington has an established system of internal controls. The Internal

Audit function reports directly to the Group 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.

In the last two years insurance premiums have increased substantially

across most areas of the business. As a consequence, a greater proportion

of routine and low value risks are now self insured, whilst external cover

is retained for more material losses.

CONTINGENCIESIn 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 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 CONCERNAfter 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 continues to adopt the going concern basis in preparing

the financial statements.

Table 3 – Post retirement benefits FRS 17 deficit* Cash cost

£m £m

Funded schemes

UK – 8

North America (89) –

Other (1) 3

Unfunded schemes

Europe (168) 7

Healthcare

US (168) 20

Total deficit as determined under FRS 17 (426)

Pension and post-retirement healthcare balancesalready provided under SSAP 24 266

Additional liability on adoption of FRS 17 (160)

* Deficits are net of deferred tax balances

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