Waterford needs careful handling

After what company chief executive described as a 'poor performance', it may take some time for Waterford Wedgwood to get back into the black,  rites Barry O'Halloran.

These days, Waterford Wedgwood looks like the kind of stock that should be treated every bit as delicately as the crystal and china that its main businesses produce. It was down 1 cent yesterday at 16 cent after posting a set of full-year results that chief executive, Mr Redmond O'Donoghue, described as a "poor performance".

Over the past year, it has traded as high as 30 cent, but a profit warning that flagged yesterday's bad news ensured that it has, more or less, stayed in the teens for the past month.

And the results did little to cheer up investors.

In the year to the end of March, the company made a pre-tax loss of €45 million, compared with a profit of €7.2 million in 2003.

Sales dropped 12.6 per cent to €831.9 million, but the company pointed out that, at constant exchange rates, this would have translated into a 3.3 per cent fall. Earnings before interest, tax, depreciation and amortisation were down 40 per cent to €68.1 million from €115 million in 2003. This was €16 million lower than some brokers' forecasts.

Speaking at a press conference yesterday, Mr O'Donoghue, said that an exchange rate hit of €30 million partly accounted for the fall in earnings. Lower sales volumes and a rise in costs added to its woes.

After goodwill and exceptional items, Waterford Wedgwood posted a loss per share of €5.63, compared with earnings per share of 22 cent last year.

At the end of March, the company had debts of €382.9 million compared with €356.7 million 12 months earlier.

It's clear from Mr O'Donoghue's remarks, and from the views of most analysts, that a good part of Waterford Wedgwood's problem lies with the fact that the buck didn't so much stop as start going backwards against the euro last year. More than half the company's sales are denominated in dollars.

Waterford translated 2004's sales and earnings figures back at an average rate of $1.18 to €1, with obvious consequences.

The company needs a recovery in the US currency's value, with an allied lift in its main markets, where it said yesterday that growth was still proving uneven.

Goodbody Stockbrokers analyst Mr Neil Clifford believes an improvement in the dollar's fortunes is crucial to the company's earnings.

"The outlook is not hugely promising at the moment and, without a significant recovery in the dollar, it's hard to see how they can trade out of it," he says. "But this time next year, the dollar could be a lot stronger."

Waterford Wedgwood has hedged its dollar exposure at between $1.25 and $1.10. Mr Clifford says that the way the company has structured this, it works out at $1.20.

If an improvement materialises, and the dollar climbs to between $1.10 and $1.17 to €1, then it will share 40 per cent of this benefit with the bank. It will not have to share if the rate goes to less than $1.10 to the €1.

Mr Joe Burnell, analyst with Davy's Stockbrokers, Waterford's own broker, agrees that the dollar has bottomed out, but he also says that the company needs to increase sales.

Sales of crystal and ceramics were both down, with the former posting a 7 per cent fall to €263.2 million and the latter sliding 5.5 per cent to €365.6 million.

"They are going to need greater sales penetration," according to Mr Burnell.

However, he adds that Waterford's newly appointed chief operating officer, Mr Peter Cameron, has plenty of expertise in the growing of high-end homeware products on US high streets.

He learned these skills in All Clad, the strongly performing subsidiary that Waterford Wedgwood has agreed to sell to French company Groupe SEB for $250 million (€207 million).

Mr Cameron yesterday professed himself very happy with the sale of his soon-to-be ex-employer.

The price was 14 times earnings - All Clad's peers are valued at around eight times earnings.

The proceeds, which Mr O'Donoghue estimated at €205 million net of expenses, will knock a big hole in Waterford's €383 million debt and save it around €10 million in interest repayments.

At €13 million, Waterford's premium cookware division delivered the best operating profit of its four businesses. For "premium cookware" read All Clad, as this accounted for almost all of this - a small European operation, Spring, which is retained, also contributed.

The analysts agree that it looks very much like Waterford Wedgwood has sold its best asset, but they also agree that the deal was too good to refuse.

"It was a very over-inflated price and the company was looking to address its balance sheet problems," Mr Clifford says. "But ideally, you would like a company in that situation to have other strongly performing assets as well."

While both analyst agree that the outlook is tough, neither believe that Waterford is in a fatal situation or that it will have to take drastic action. They are very sceptical of the speculation in some quarters that its biggest shareholder, Sir Anthony O'Reilly, would consider taking it private if things don't improve.

Its plans do go beyond simply selling All Clad and cutting debt and reducing interest payments. It has outsourced production at its Johnson Brothers' Earthenware business to China, cutting 1,100 jobs. This will save it €30 million.

At the same time, it said it would reduce its working capital requirement by €40 million over 18 months by cutting inventories.

Mr O'Donoghue says that half of this money will go into a renewed marketing drive over the same period of time. Waterford has tried this in the past, but it has not always worked.

However, Mr Clifford says it is well positioned to achieve it this time around. Mr Burnell agrees but he does point out that all the other ingredients of the company's plan also need to work out as they are predicting, and he says it will take time.

"I don't think it is likely to be earnings positive before 2006," he says.

Handle with care then.