The Investment Column: Pilkington

PILKINGTON, the glassmaker, has been pursuing a costly restructuring programme since Paulo Scaroni's arrival in 1997. Yesterday it appeared to have convinced the market the pain is starting to show some gain.

Investors have got used to seeing exceptional restructuring charges outstrip annual profits. However, the annual results showed cost saving and purchase price improvements comfortably compensating for falls in volumes and selling prices. So is Pilkington, whose shares have underperformed the market by up to 80 per cent since 1996, on the verge of a turnaround?

The reorganisation at Pilkington has been savage, and is far from over. The group says its cost-cutting drive will "never" end. Mr Scaroni claims the company is as competitive as its peers. But the results do not entirely support the claim.

Glass production is a commodity business so Pilkington's customers drive hard bargains. Producers can differentiate themselves only on price. Pilkington's operations are split between glass for buildings, and new and replacement glass for cars. Only one division, European building products, showed signs of benefiting greatly from the axe-wielding. Nevertheless, it is the largest part of the group at 30 per cent of sales. Margins here rose from 5 to 9 per cent.

Pilkington's challenge is to replicate that improvement in the rest of the group. The problem is that Pilkington's customers are the likes of GM, who are in the driving seat when it comes to price negotiation. It is also up against leaner competitors and has already seen falling demand from Japan for its US products.

Emerging markets are looking even tougher, with Pilkington losing market share to both local and overseas rivals. Car production fell sharply in Brazil and crisis-stricken Asian producers are dumping glass elsewhere in South America.

While the results show Pilkington's earnings growth looking more stable, the group has not yet become as efficient as it needs to be to compete in markets dogged by overcapacity. Analysts expect pre-tax profits of around pounds 160m in 2000 and earnings of 8.3p per share. The shares remains risky.