- THE MAGAZINE
“The outcome for 2008 reflects two very different periods of trading, with continued growth in our end-markets in the first nine months and then a rapid and significant weakening in the final quarter,” said Nick Salmon, chief executive. “The results benefitted from a stronger-than-expected contribution from Foseco, the integration of which will yield greater synergies than first expected. We have reacted quickly to the downturn, implementing cost reduction measures to generate £40 million (~ $55 million) of annualized savings and a cash conservation plan, which, through the suspension of expansion capex, dividends and UK pension ‘top-up’ payments, reduces cash outflow by greater than £85 million (~ $117 million) compared to 2008. We also significantly reduced our debt and improved our capital structure through the recent net £241 million (~ $332 million) rights issue proceeds.
“As previously signaled, our major markets have remained weak in the first quarter and we expect only a slow improvement through the second as the de-stocking in our end-markets comes to an end. Longer-term, we believe we are well-positioned, with a portfolio of businesses supplying high-technology consumable products with leading positions in markets with sound prospects for growth as the global economy recovers.”
The results for 2008 reflect two very different periods of trading. Over the first nine months, Cookson experienced continuing growth in its main end-markets of steel, consumer electronics and automotive. However, from late September the group saw a rapid and significant weakening, reflecting the severe global economic downturn. As a result, the group achieved a return on sales margin of 10.7% over the first nine months, which fell to 7.3% for the last quarter of the year.
Despite the weak fourth quarter, the full year results showed a significant improvement over 2007. Revenue of £2,203 million (~ $3,044 million) and trading profit of £216.3 million (~ $298.9 million) increased 23% and 11%, respectively, at constant exchange rates, reflecting both the contribution from Foseco following its acquisition in April 2008 and also the positive impact on revenue of passing through higher metal prices. The weakening of sterling had a significant positive impact such that on an “as-reported” basis, revenue and trading profit increased 36% and 28%, respectively. Headline profit before tax increased by 18% and headline earnings per share by 9%.
Cookson has reacted to the economic downturn by implementing a series of cost reduction and cash conservation measures, and raising £241 million of net proceeds via a rights issue announced in January 2009. These proceeds have reduced the group’s indebtedness and created a more suitable capital structure for the current economic environment.
During the fourth quarter of 2008, the group completed the first phase of cost reductions to yield annualized savings of £17 million (~ $23 million) from early 2009 onward. This included reducing temporary and full-time headcount by over a combined total of 550 and implementing an extensive salary freeze for the first half of 2009.
In January, Cookson launched a second phase involving the proposed permanent closure of six Ceramics manufacturing facilities in the UK, Mexico, Belgium, Germany and the U.S., together with overhead staff reductions. These measures will result in a further total headcount reduction of over 700 and are expected to result in annualized savings of £23 million (~ $32 million) from mid-2009. Of the total annualized savings of £40 million (~ $55 million) arising from both phases, £30 million (~ $41 million) is anticipated to be realized in 2009 and an incremental £10 million (~ $14 million) in 2010.
Cookson has also introduced a new group-wide incentive program to focus on cash generation with particular emphasis on reducing working capital in line with reduced business volumes. In addition, all capacity expansion-related capital expenditure projects have been postponed, pending clear signs of recovery in our end-markets. Similarly, the payment of dividends is being suspended for the time being.
More recently, the group has agreed with its banks to pre-pay the facility tranches due to be repaid next year in exchange for which the tightening of the net debt to EBITDA covenant from 3.5 times to 3.0 times has been deferred by a further year to June 30, 2010. Cookson has also agreed with its UK pension trustee to suspend the monthly “top-up” payments, which totaled £22 million (~ $30 million) in 2008, until the earlier of July 2010 or the recommencement of dividend payments.
The acquisition of Foseco significantly expanded the existing Ceramics division and brought together the two largest worldwide specialists in ceramics for molten metal handling. Following the completion of the acquisition on April 4, 2008, Cookson sold Foseco’s Carbon Bonded Ceramics (CBC) business to satisfy regulatory requirements, and closed its “plc” headquarters. Anti-trust requirements were met with the disposal of Vesuvius’ Hi-Tech ceramic filters business in December 2008. The integration has progressed very well and further potential synergy opportunities have been identified such that Cookson has increased the annual synergy savings target from the original £18 million (~ $25 million) to £24 million (~ $33 million) by 2010.
During 2008, the Foseco businesses have performed well ahead of original expectations. On a pro-forma basis (excluding CBC and “plc” costs) for the full year 2008, they delivered revenue of £486 million (~ $671 million) and trading profit of £72 million (~ $99 million), up by 18% and 24%, respectively, at reported exchange rates over full year 2007, despite a slowdown over the last two months of 2008.
The enlarged division, which trades as Foseco in foundry markets and as Vesuvius in all other markets, recorded revenue of £1,264 million (~ $1,746 million) and trading profit of £167.7 million (~ $230.9 million), giving a return on sales margin of 13.3%. Excluding the contribution from Foseco, underlying revenue was up 4% for the year as a whole, having been 8% ahead at the half year, but trading profit was down 8% for the year on a constant currency basis, reflecting the fourth quarter performance. Including Foseco, the fourth quarter revenue was £326 million (~ $450 million) and trading profit £34.1 million (~ $47.1 million), giving a return on sales margin for the fourth quarter of 10.5%.
When compared to the same periods in 2007, global steel production (a main end-market) grew 5% in the first nine months but fell 14% in October, 20% in November and 24% in December. The pattern in the foundry markets was similar but the slowdown only started in November. Cookson’s fused silica, Solar Crucible™, market continued to experience strong growth. Against this background, revenue and underlying growth for the four product lines was as follows (at constant exchange rates and including Foseco pro-forma on a full year basis): steel flow control, £430 million (~ $594 million), up 1%; linings, £433 million (~ $598 million), up 5%; foundry, £457 million (~ $631 million), up 6%; and fused silica, £72 million (~ $99 million), up 20%.
The Electronics division’s revenue of £620 million (~ $857 million) was up 11% at reported exchange rates, but at constant exchange rates and eliminating the pass-through of increased metal prices, underlying revenue was down 9%. Trading profit of £51.7 million (~ $71.4 million) was down 11% at reported exchange rates and 22% at constant exchange rates. This again reflects a very poor fourth quarter, in which revenue was £135 million (~ $187 million) and trading profit £6.6 million (~ $9.1 million), giving a return on sales margin of 4.9%.
Revenue for the Assembly Materials product line was £382 million (~ $527 million) and £238 million (~ $328 million) for the Chemistry product line, down 10% and 9%, respectively, on an underlying basis. Chemistry had a particularly weak fourth quarter, reflecting its exposure to the automotive and electronics end-markets.
For the Precious Metals division, net sales value of £118 million (~ $163 million) was 3% higher than the prior year at constant exchange rates. This reflected higher levels of reclaim activity in Europe and gold coin blank production in the U.S., both stimulated by the high price of gold, together with the additional volumes from the Leach & Garner business acquired in September 2007, offsetting the sharp decline in consumer demand for retail jewelry. Trading profit of £4.5 million (~ $6.2 million) was approximately half that of the prior year, reflecting a lower margin product mix in the U.S.
Cookson’s divisions predominantly supply consumable products on short lead times to the global steel, foundry, electronics and precious metals industries. As such, the group’s expectations of future trading are based upon an assessment of end-market conditions and these conditions are subject to greater uncertainty than usual in the current economic climate. As predicted, Cookson’s major markets have remained weak through January and February. The group expects a slow improvement through the second quarter as the de-stocking in end-markets comes to an end. Further improvements are expected in the second half, reflecting the group’s normal trading seasonality and supported by the anticipated boost to infrastructure demand from the stimulus packages recently announced by governments around the world.
Actual trading performance will depend on the depth and duration of the global economic downturn. Despite the difficult trading conditions, the group’s performance in 2009 will benefit from anticipated cost savings of £30 million (~ $41 million) arising from the cost reduction actions described; a full-year contribution from Foseco (vs. only nine months in 2008); and the realization of additional Foseco-related integration synergies, which are anticipated to be £12 million (~ $16 million) in 2009.
The reported results will also benefit from significant currency translation gains if sterling remains at current levels relative to other major currencies. For the longer-term, Cookson believes that it is well-positioned with a portfolio of businesses supplying high-technology consumable products and related technical services, and with leading positions in markets with sound prospects for growth as the global economy recovers.
Additional details are available at www.cooksongroup.co.uk.