Company's heavy debt raises concerns

Analysis: Decision to cut dividend by 40 per cent adds to investor woes, writes Siobhán Creaton

Investors can only be disappointed by the continuing difficulties at Waterford Wedgwood and some are growing increasingly concerned about the company's debts.

In March, the luxury goods group warned that sales of its products, which are largely reliant on the US market, were weak but said it would still be in a position to maintain its generous dividend to shareholders.

When they learned yesterday that the final dividend will be slashed by almost 40 per cent to 1.9 cent per share, investors could only conclude that the situation had deteriorated beyond that flagged three months ago.

The stock markets had largely been anticipating that Waterford Wedgwood would struggle this year and so the share price closed unchanged. Some analysts were impressed at the €7.3 million profits it managed to achieve after having absorbed €35 million in restructuring costs, but none were forecasting great potential for profit growth over the coming months.

Over the 12 months to the end of March, sales of Waterford Wedgwood products fell by 4.6 per cent to €951.3 million. Sales of crystal and ceramics were down while its premium cookware and other products were stronger.

There seems to be no immediate sign of any improvement in the outlook for sales with figures for the months of April and May continuing to disappoint.

Profit margins remain under pressure as retailers are still discounting stocks to stimulate demand.

As some 51 per cent of the group's sales are to the US market the slide in the value of the dollar against the euro has further eaten into profits.

According to the company, a one cent change in the value of the dollar against the euro will either add or reduce Waterford Wedgwood's profits by €1 million.

The company has hedged its exposure to adverse movements in the value of the US currency for the rest of the year at a rate of $1.09 (€0.93).

Group chief executive officer, Mr Redmond O'Donoghue, is hoping that a cut in European Central Bank rates, possibly as early as today, could help to boost the dollar's fortunes and alleviate some of the pressure on the company.

But it is Waterford Wedgwood's heavy debt burden - and particularly news that it is renegotiating loans advanced by 12 banks - that has raised concerns. At the end of March, the group, which was yesterday valued on the Irish Stock Market at €178 million, had total debts of €357 million.

The weakness of the dollar has helped to bring that figure down as some of its liabilities are held in the US currency. According to the company the decline in the dollar shaved €30 million off last year's debts.

Waterford Wedgwood has refuted suggestions that the banks may have intervened to encourage the board of directors to cut the dividend payment but some market sources believe that the financial institutions will play an increasing role at the company in the future.