Reality brings Waterford back to earthenware

Waterford Wedgwood will announce continued strong profit growth tomorrow. It has already unveiled the sales figures - a 20.4 per cent increase (underlying 9.8 per cent) to €879.6 million (£693 million) in 1999, from €730.5 million in 1998 - which were ahead of forecasts.

That announcement was ahead of the important Frankfurt ceramics and crystal trade show and was designed as a marketing ploy as it showed off its wares to important world buyers.

But investors will be more interested in the nitty-gritty financial figures tomorrow. Pre-tax profit should show a rise to comfortably above €65 million, from €51 million. The focus will probably be on Waterford Crystal which is just bounding ahead, not only with its traditional products, but also with the outsourced products and the high-profile designer goods such as John Rocha, Jasper Conran and the Rosenthal Bulgari collection.

Indeed, all ratios are moving in the right direction for the crystal company: sales should be up by more than 30 per cent, operating profits by more than 40 per cent. That should be enough to push margins up by about 1 percentage point. As crystal accounts for about two-thirds of the profit before interest and tax, its performance is crucial. But the focus should be on Wedgwood, the British earthenware and china subsidiary, because that is acting as a break to growth.

At the half-way stage there was a static performance from Wedgwood. Its sales suffered a marginal decline to €123.4 million, from €128.6 million. (Rosenthal, the German porcelain manufacturing subsidiary, also had a contraction to €73.4 million from €76.5 million). Wedgwood's sales in Britain and Ireland were described as "steady". Product line such as Sarah's Garden, Variations and Weekday Weekend enjoyed steady sales increases. The full year figures are likely to indicate a small increase in profits; a much better performance than most in the UK ceramics industry.

No one seriously thinks the appointment of Sarah Ferguson, Duchess of York, as its official ambassador in the US, at a fee of some £500,000, will lead to an upsurge in orders. But the US public is susceptible, and swayed, by such marketing tools and as such it should increase awareness of the brand.

But a far more important question for Wedgwood, is what it will do with its 14.9 per cent stake in rival Royal Doulton, which last week announced substantial losses. More crucially, and more worrying, is the long recuperation period envisaged. Chairman Mr Hamish Grossart described 1999 as the "first full year of a four-year turnaround period". That means it will be the end of 2002 before the problems recede.

A much quicker turnaround was anticipated and Waterford Wedgwood should seriously consider its options. It bought the stake at 90p sterling per share (they closed at 99p on Friday), at a total cost of £11.1 million sterling (€18.3 million), as a strategic investment. It was hoping for co-operation from the Royal Doulton board. Instead it got a frosty reception. Royal Doulton complained it received no prior notice and sought clarification of Waterford Wedgwood's intentions. Meetings did take place but there is now a stalemate.

Basically, Waterford Wedgwood would like to see trading co-operation between Wedgwood and Royal Doulton in a highly competitive industry that needs considerably more rationalisation. It said it did not intend to make a bid but reserved the right to do so if some other competitor came on the scene.

Royal Doulton does not see this as clarification, as Waterford in effect is keeping its options open - so down came the shutters. That is a pity as Mr Grossart, a director of many companies, including deputy chairman of Scottish Radio, is not averse to takeovers and rationalisation, as his record has shown.

While the Royal Doulton shares soared to more than 130p after Waterford's acquisition now they just exceed the consideration price. But if Waterford has problems in not realising any immediate benefits from its investment, Royal Doulton has substantially greater problems. It recorded a loss of £26.4 million sterling in 1999 compared with profits of £2.4 million in 1998, and sales contracted by 20 per cent to £190.3 million.

It is taking radical moves to sort itself out. A rationalisation programme resulted in a 24 per cent reduction in employment to 5,700, loss-making retail units have been shut down, manufacturing capacity has been reduced closer to demand, volumes have been reduced to cut price discount channels and new products have been reduced.

Royal Doulton is about three years behind Wedgwood's rationalisation programme which has substantially reduced capacity and is still not getting an adequate return. Peter Goulandris, who has taken over executive responsibility for Waterford Wedgwood's ceramics division has his work cut out for him.

Bill Murdoch is contactable at bmurdoch@irish-times.ie