Waterford Wedgwood produced its final results during the week, which were more or less in line with analysts' forecasts, but showed virtually no growth in profits. Group sales rose by 38 per cent in 1998, but this was primarily due to the recently acquired German ceramics producer, Rosenthal. Sales from the Waterford Crystal division grew by a strong 18 per cent. However, Wedgwood saw its sales decline by 1 per cent.
It is somewhat ironic that Wedgwood, which kept the group going through the very difficult times in Waterford Crystal, should now be acting as a major drag on overall performance. Sales and margins at Wedgwood are being squeezed because of weak Asian markets and the strength of sterling. In addition, British demand has been weak as that economy continues to flirt with recession.
As of yet the Rosenthal acquisition has done little to improve the group's financial performance. It produced a modest operating profit of £3.8 million (€4.83 million) in 1998, but this is far short of the financing costs of the acquisition. It remains to be seen how long it will take the Waterford management to bring the Rosenthal business up to a level where it is generating an acceptable return on capital invested.
In contrast to Wedgwood and Rosenthal, Waterford Crystal had a tremendous year and was able to capitalise on the very robust US economy and further increased its share of the crystal market to 50 per cent. This compares with a market share of under 25 per cent as recently as 1991. New product introductions have been the driving force behind the rapid sales growth in the US. Advances in sales have fed through to the bottom profitability line as the company has reaped the rewards from the major restructuring programmes of the late 1980s and early 1990s.
Despite the success story at the crystal division the group is still a long way from firing on all cylinders. The need for further remedial action is highlighted by the restructuring charge of £24.6 million taken into the 1998 accounts. Shareholders have endured a dismal performance from the shares over both the short and the long term. Prior to the Asian crisis the company looked like it had finally turned the corner and the shares traded above 150 cents (118p) for a brief period in 1998. However, the Asian crisis led to a sharp ?????derating and the shares are now trading around 72 cents which is barely above the end 1994 share price.
Future prospects for the share price do not look particularly exciting even though the shares are now trading on an undemanding rating 10 times earnings. However, tableware companies such as Denby and Royal Doulton in Britain trade on even lower price/earnings multiples. It is only the larger consumer branded companies such as LVMH of France and Gucci of the US that trade on P/E's in excess of 20.
The prospects for the share price hinge on two key factors, namely, sustained sales growth in the US market for glassware and the timing of a turnaround at Wedgwood and Rosenthal. As long as the US economy continues to grow, Waterford Crystal looks as if it is well capable of making further advances in the US.
The situation facing Wedgwood and Rosenthal looks far more problematic. Sales growth will depend on upturns in the Asian and British economies that are unlikely to materialise until next year at the earliest. Even with an upturn in the overall level of activity in these markets, a big question mark exists over whether the Waterford management will be able to successfully develop new brands in the more staid tableware market. Until the situation regarding sales growth at Wedgwood and Rosenthal clarifies the share price is likely to continue to mark time.
