Pilkington warns on the cost of German cuts

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Pilkington, the St Helens-based glassmaker, yesterday dealt shareholders a fresh blow by warning that profits would be pounds 55m lower this year because of the need for further redundancies and asset write-downs in Germany.

The warning sent Pilkington shares down a further 6 per cent to 121p compared with the 155p investors paid 18 months ago in a pounds 303m rights issue.

Pilkington said that a collapse in flat glass prices since the start of the year and a slowdown in the German construction market meant that it would have to take the axe to its continental operations again for the second time in two years.

About 1,000 jobs are likely to be slashed in Germany as Pilkington cuts its processed glass capacity by 20 per cent. The cutbacks come on top of 1,900 job losses announced last year at cost of pounds 155m.

The fresh cutbacks means the group will incur restructuring costs approaching pounds 20m in each of the next two years. It is also taking a further pounds 40m charge to cover asset write-downs in the year just ending.

Pilkington said that as a result profits would be not less than pounds 130m in the year to 31 March. That compares with forecasts of pounds 250m last June and pounds 190m as recently as last November.

Sir Nigel Rudd, Pilkington's chairman, said these results represented a "setback" but he said its underlying strategy of cutting costs and rebuilding the business remained sound.

Finance director Andrew Robb said that most of the damage had been done by the sharp fall in glass prices since the end of 1996. This had been exacerbated by the strength of the pound against the mark, the building of new capacity in eastern Germany and weak German construction markets.

Float glass prices have slumped from DM6.30 a square metre in November 1995 to DM4.50 now and Pilkington is not budgeting on them rising above DM5 for the remainder of this year. Mr Robb said the exchange rate impact on the group would be between pounds 10m and pounds 20m this year if the pound stayed at current levels.

Germany is Pilkington's biggest single market, accounting for about pounds 800m of its pounds 2.8bn turnover. The group has four float glass lines in Germany and extensive process glass operations making finished products for the building and automotive industries such as double-glazing and car windscreens.

But prices there have come under increased pressure because of the slump in construction orders and the move by rival glass maker Guardian to add to capacity by building a new line in eastern Germany. Overcapacity is reckoned to be running at about 10 per cent.

The latest cuts will not affect Pilkington's float glass lines in Germany which are operating at about 90 per cent capacity and are still having to produce glass to be shipped over to the US where Pilkington's six float lines cannot cope with demand.

In the last four years Pilkington has taken pounds 300m out of its costs but still has more to do. "It has been a constant battle to turn a collection of acquisitions into a fighting fit company," Mr Robb said.

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