Waterford not likely to produce major surprises

Do not expect any major surprises from Waterford Wedgwood's interim results on Wednesday. There will not be any but there will be some mini ones. Group operating profits should show a growth of more than 10 per cent. Moreover, as it takes in the newly acquired German porcelain manufacturer, Rosenthal, for the first time, sales should top £250 million, representing a significant rise on the £174.9 million generated in the first half of last year. With Rosenthal under its belt, it is now operating on three strings. These strings, however, are singing very different tunes. While Wedgwood, the fine china and earthenware string, came to the rescue of Waterford in the not too distant survival days, it is the crystal company - Waterford Crystal - that is now providing most of the sparkle. That should be apparent from Wednesday's figures. Wedgwood must have felt some impact from the Asian crisis, where 28 per cent of its sales are generated.

Other British based tableware companies, for example, have been complaining about a fall off in Asian sales. Also, they have reported sluggish retail sales in Britain. In common with other exporters, they have been badly affected by the strength of sterling. On the positive side, Wedgwood must be getting some benefits from the £27 million rationalisation programme which was designed to make 560 people redundant. While the programme has not yet been completed, costs savings of £14 million have been estimated for the full year. Nevertheless, this is unlikely to have resulted in growth from Wedgwood. While sales in Irish pounds may show some rise, it will not be surprising if underlying growth is lower. In addition, with such an exposure to Asia, a drop in operating profits must be on the cards. In contrast, Waterford Crystal is bounding ahead. Its core business, and new products, are experiencing strong growth in its most important market, the U.S. Moreover, following the severe pruning of labour and other costs, and the outsourcing of the cheaper Marquis range, it is squeezing more out of sales.

The operating profit margins from Waterford Crystal increased from 11.8 per cent to 12.8 per cent last year. That trend is likely to have continued in the first six months of this year, though margins are lower in the first half. Rosenthal, the third string, was forecast to breakeven by the end of this year. It has been performing better than anticipated and it could have broken even in the first half. Rosenthal could, therefore, move into profits in the second half.

Rosenthal has little or no exposure to Asia, with just 2 per cent of sales generated there. However, as its products are discretionary sales, it would be affected by any slowdown in the German economy where it generates most of its sales. If it turned out that German banks had to make a substantial write off due to their large exposure in Russia, that could have a negative impact. Rosenthal, however, has been expanding its lines. The six year licensing agreement with Bulgari, the contemporary Italian jeweller, is an example. The first collection, including porcelain plates, porcelain gifts, silver cutlery and crystalware will be launched next year. This follows a similar agreement with Versace, the Italian fashion house whose head, Gianni, was murdered in Miami, last year. However, as the acquisition of Rosenthal was funded from the group's internal sources, the level of debt has risen and so have interest costs. The extra group operating profits are unlikely to be sufficient to cover the higher interest. Therefore, pre-tax profit could well be lower.

If indeed this is confirmed by the interim figures, then Waterford Wedgwood will have a difficult task in meeting some brokers' predictions of £49 million for the full year (up from £40 million pre-exceptionals in 1997). Wedgwood is now providing the brake on the group's forward move. Waterford Wedgwood is fortunate in having no exposure to the Russian economy, and 86 per cent of its sales are generated outside Asia. Nevertheless, that 14 per cent is sufficient to curtail its plans.

The group is going to find it more difficult to reach its target operating profit margin of 15 per cent by the year 2000.