Waterford Wedgwood is still not firing on all cylinders

with Sarah Ferguson, Duchess of York, to renew her US promotional deal after US ceramic sales increased by 15 per cent in the first half of 2000. Her two-year contract, giving her £500,000 sterling (€813,802) per annum, is coming to an end early next year.

Her initial appointment was greeted with a little cynicism on this side of the Atlantic but the group attributes part of the resurgence of Wedgwood's products in the US to her promotions. Finance director Mr Richard Barnes told The Irish Times the group was very pleased with her contribution. "We are beginning to set up a new set of negotiations", but he declined to say if she would be paid more. "Her brief", he said, was to "lift awareness of the brand on TV and the press and she visits 40 to 50 stores per annum showing the stores' customers how to lay tables with Wedgwood products".

Squeezing more from the ceramics side is one of the group's priorities. The other priority must be to address the group's poor share rating; despite continued strong growth, Friday's closing share price of 128 cents, while above the year low of 90 cents, was well below the high of 157 cents two years ago. Indeed, two of the trio executive team - Richard Barnes and Redmond O'Donoghue - had to allow some of their share options to lapse because of the poor share price.

The latest interim results - pre-tax profit up 31 per cent to €18.2 million (£14.3 million) and sales up 30 per cent to €447 million - were broadly in line with expectation, but the resurgence of sales at the ceramics division could give the group that extra boost if the extra sales were translated into profits. But will it?

Last year crystal generated an operating profit of €57 million on sales of €395.2 million. That was a return of 14.4 per cent. Ceramics generated an operating profit of €14 million on sales of €396.8 million. That was a return of just 3.5 per cent. Had ceramics generated the same return, that division would have added €43 million to operating profit.

The interim results showed the ceramics division was becoming more important to the group. Sales of €202.7 million easily outstripped crystal's sales of €178.0 million. With the inclusion of sales from the recently acquired German porcelain group, Hutschenreuther, the latest figures would be boosted a further €25 million. That would make ceramics sales 30 per cent higher than crystal's. However, that could take some time, as the production of Hutschenreuther is being integrated with Rosenthal, the group's other German porcelain producer. At the time of Wedgwood's rationalisation, savings of £8 million sterling and £15 million sterling were projected in two phases. The full benefits are not expected until 2003 but part of these benefits must be flowing through by now. The group has been pulling out all the plugs to make ceramics more profitable. While rationalisation has been necessary in an industry still suffering from over-capacity, the development of new products has been important. And Wedgwood has not been afraid to go for niches. The promotion of a dog's bowl for £90 sterling is one; this was considered so important that a dog's head was superimposed on last week's interim results. And to prove the point, the group announced that Elton John has bought 12 inscribed bowls for his 12 dogs.

However, despite the determined marketing effort, and the painful rationalisation programme, the ceramics division is unlikely to match the returns from crystal or the All-Clad's cookware products. Ceramics might meet the 15 per cent criterion set by the group chairman, Dr Tony O'Reilly, at the top of the cycle. Industry sources say an average of 7 to 8 per cent would be more appropriate while it is well within the capability of crystal and cookware to have an average of 15 per cent. Nevertheless, Waterford Wedgwood, should continue to grow strongly and top €1 billion in sales this year compared with €879.6 million. Part of that will come from All-Clad which will contribute a full 12 months and more will come from expansion out of the US market.

But what about profits? UBS Warburg forecasts a rise in earnings before interest and tax from €82.9 million to €103.9 million in 2000, to €121.75 million in 2001 and to €147.1 million in 2002. Over the same period the overall margin should rise from 9.4 per cent to 9.6 per cent to 10.7 per cent and to 12.2 per cent. That would still be short of the target.

Waterford Wedgwood is not firing on all cylinders; Rosenthal was a bit limp in the first half but it is becoming more profitable. It is included in the luxury brands sector by US brokers who are recommending it as an investment. Under virtually all categories, it is the least rated. Its projected p/e for 2001 at 12.3 is half of Gucci's rating and a third of Bulgari's and Christian Dior's. UBS Warburg says "given its similar growth profile. . .this discount is unjustified". Considering its collection of internationally known brands, and its itchiness for continued growth, that gap needs to be substantially reduced.