Pilkington counts the cost of contact lens acquisition

BY TOM STEVENSON

Deputy City Editor

Pilkington, the St Helens-based glass manufacturer, announced a pounds 248m loss for the year to March, as it counted the cost of an expensive diversification into contact lenses in the late 1980s. The company warned that staff numbers would have to come down further to cut overheads.

A pounds 375m goodwill write-down, which was forced by accounting changes, was dismissed by the company as nothing more than a technicality. But it took the shine off strong underlying profits growth as trading improved throughout the group.

The charge relates to the excess over net assets the company paid when it acquired Visioncare between 1987 and 1989. The company was intended to reduce the volatility of Pilkington's profits but changes in the industry, recession and the demands of the rest of the group on cashflow turned the deal sour.

Including the exceptional charge, Pilks announced a loss per share of 40.7p, but the strength of the underlying performance meant it increased the full year dividend by 5 per cent to 4.2p. The market focused on the unexpected payout hike, and the shares closed 11p higher at 189p.

Pilkington also said it would be cutting a further 1,000 jobs this year as part of an ongoing cost-cutting programme with some redundancies in the UK. It shed a similar number of workers last year, mainly in Europe.

Before the exceptional charges, which also included pounds 31m to cover the out-of-court settlement of a 10-year legal dispute, pre-tax profits doubled to pounds 144m as volumes rose in all Pilkington's markets.

New products and cost reductions, which have amounted to pounds 230m over the past three years, also boosted profits, offset by still falling prices in some areas.

Double glazing overcapacity in Germany remains a problem and Pilkington's large car manufacturing customers continue to put the squeeze on prices.

Capacity utilisation remained tight in the US, leading to higher margins in America and the UK, although the company warned that the return on sales even at the peak of the cycle would be lower than during the last boom.

Pilkington, like British Steel and ICI, is among Britain's most cyclical companies. Its profits rise more quickly than the rest of the market in good years but it suffers disporportionately when markets turn down.

Since 1990, when it made more than pounds 300m, the company's profits have fallen sharply, although analysts expect them to recover rapidly for the next two or three years, beating the previous peak in 1997.

Investment Column 34