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Cookson Group PLC recently released its 2009 first half financial report, including revenue of £929 million (approximately $1.5 billion), down by one-third on an underlying basis; trading profit of £16.5 million (~ $27.2 million), with all divisions profitable; cost-reduction programs proceeding as planned to reduce annual cost base by over £65 million (~ $107.2 million) and headcount by 3200 (19%) from September 2008 levels; exceptional charges (pre tax) of £86 million (~ $141.8 million), including £66 million (~ $108.8 million) for restructuring; free cash flow of £84 million (~ $138.5 million), compared to £7 million (~ $11.5 million) in the first half of 2008; net debt reduced by £294 million (~ $484.7 million) to £438 million (~ $722.1 million), through rights issue and strong cash generation and after £24 million (~ $39.6 million) cash outflow for restructuring; and some recent signs of recovery in ceramics end-markets, as well as progressively improving trends in electronics end-markets since March continuing into the third quarter.
“We have faced very tough trading conditions throughout the first half of 2009,” said Nick Salmon, chief executive. “However, through the rapid implementation of our cost-reduction programs, all divisions have remained profitable. After trading just above break-even levels in the first quarter, trading profit has progressively improved through the second quarter. Our main ceramics end-market of steel production has recently seen some signs of recovery, and our electronic materials end-markets have seen progressively increasing levels of activity since late March.
“Combined with the rights issue, a strong focus on cash generation and lower working capital levels has enabled us to make further progress in reducing debt to £438 million, notwithstanding a cash outflow of £24 million for restructuring. Whilst the timing and extent of recovery in our end-markets remains very difficult to predict with accuracy, we continue to expect a progressive improvement in our performance in the second half of the year as further cost-reduction benefits materialize and sales volumes improve.”
At £929 million, Group revenue in the first half of 2009 was 27% lower than the same period last year at constant exchange rates (12% lower at reported exchange rates). This reflected the severe downturn in the global economy and all of Cookson’s end-markets, being only partially offset by a six-month contribution from Foseco in the first half of 2009 vs. a three-month contribution in the prior period. On an underlying basis (as if Foseco had been acquired with effect from January 1, 2008, at constant exchange rates and adjusted for the pass-through of lower metals prices in the Electronics and Precious Metals divisions), revenue was down by one-third compared with the same period last year.
Trading profit was £16.5 million, compared to £113.3 million (~ $186.8 million) in the first half of 2008. Almost all of this was earned in the second quarter, which benefited from the ongoing cost-reduction program, a progressive pick-up in electronics end-markets in Asia since late March, and the first signs of a pick-up in ceramics end-markets in June.
Revenue of £543 million (~ $895.2 million) in the Ceramics division was 7% lower than that reported for the same period last year. On an underlying basis (at constant exchange rates and as if Foseco had been acquired on January 1, 2008), revenue was down 35%. Trading profit was £11.4 million (~ $18.8 million), compared to £85.1 million (~ $140.3 million) in the first half of 2008.
Global steel production is the division’s main end-market, corresponding to a little over half of its total revenue. Over 80% of the Steel Flow Control revenue and almost all of the Linings revenue currently arises outside China, the world’s largest steel producer. According to the World Steel Association, global steel production fell 21% in the first half compared to the same period last year; excluding China, it fell 35%. June saw a modest improvement in this trend, with a year-on-year decline, excluding China, of 30%, better than any month since November 2008. Weekly steel production in the U.S. has continued to rise through July, indicating that the inventory de-stocking phase is complete in NAFTA, although short-term trends in Europe are more difficult to predict due to the impact of the summer vacation season.
Underlying revenue in Steel Flow Control and Linings was down 38% and 25%, respectively. Linings was less affected by the downturn in steel production, as around one-quarter of its revenue is related to other industrial processes and, in its steel-related activities, it benefitted from an order backlog of maintenance projects.
The foundry castings market, which represents around one-third of the Ceramics division’s revenue, has similarly experienced weak trading reflecting, in particular, very low levels of light vehicle and heavy truck production, and underlying revenue was down 42%.
Fused Silica product line markets have also experienced significantly reduced demand. The solar panel industry has been experiencing a sharp de-stocking of excess inventory, which was built up over the second half of last year in anticipation of strongly rising demand that has not yet materialized. Underlying revenue in the Fused Silica product line was down 27%. From a breakeven position in January and February, trading profit for the division improved as the first half progressed mainly due to the progressive realization of savings from cost-reduction programs.
In the Electronics division, revenue of £240 million (~ $395.7 million) was 25% lower than that reported for the same period last year. On an underlying basis, at constant exchange rates and adjusted for the pass-through of lower metals prices and precious metal sales, revenue was down 33%. Trading profit was £6.3 million (~ $10.4 million), compared to £29.9 million (~ $49.3 million) in the first half of 2008.
All of the division’s key end-markets (electronics, industrial and automotive) were very weak through the first quarter of 2009. Underlying revenue in the first quarter was down 37%, but since late March, electronic materials end-markets (nearly two-thirds of revenue) have progressively improved as the customer de-stocking phase appears to be largely over and end-demand recovers. Industrial and automotive markets (one-third of revenue) have continued to be weak throughout the first half. The division traded around breakeven in January and February, but recorded an increasing month-on-month trend thereafter as a result of the improvement in electronics end-markets and also due to the increasing benefit of the cost-reduction programs.
Phase I of the Group’s cost-reduction initiatives was completed in the fourth quarter of 2008, and phase II (initiated in early 2009) is now substantially complete. These have involved significant headcount reductions in all three divisions. Together they are expected to generate around £40 million (~ $65.9 million) of annualized savings, of which £30 million (~ $49.5 million) is expected to be realized in 2009. In May, phase III was announced and is expected to generate approximately £13 million (~ $21.4 million) of additional annualized savings, of which £5 million (~ $8.2 million) is expected to be realized in 2009.
In addition, the Foseco integration cost-reduction program, launched in April 2008, has been successfully completed. As a result of these initiatives, Group headcount by the end of 2009 is expected to be around 3200 lower than at September 2008, a reduction of 19%. Eight production facilities will have been permanently closed and three more significantly downsized, together with substantial reductions in overhead costs, mainly in Europe and the U.S.
The benefit to trading profit in the first half of 2009 is estimated to have been approximately £16 million (~ $26.4 million). The incremental benefit to trading profit in the second half of 2009 (when compared with the first half) is expected to be around £15 million (~ $24.7 million). Total cash-related restructuring and integration costs for full year 2009 are expected to be around £70 million (~ $115.4 million).
Additional details are available at www.cooksongroup.co.uk.