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Cookson Group plc recently released an interim management statement regarding current trading, financial position and outlook. The statement covers the period from January 1, 2009, to May 13, 2009.
“Through the first four months of 2009, our Ceramics division’s main end-market, global steel production, remained at December 2008’s low levels,” said Nick Salmon, chief executive. “The Electronics division has seen some progressive pickup in demand through March and April, particularly in Asia, following very low levels in January and February.
“For the first four months, the Group’s underlying revenue was down around one-third compared with the prior year. Trading in January and February was at break-even with a modest profit in each of March and April. Given the continued weakness in our ceramics end-markets, particularly steel and vehicle production in Europe and NAFTA, we are now initiating a third phase of restructuring initiatives involving further Ceramics manufacturing capacity and overhead reductions.
“We expect some modest improvement in our trading profitability through the remainder of the second quarter as further benefits from our previously announced cost reduction programs come through and as electronics end-markets continue to improve. Our much-reduced cost base and high inherent operational gearing should ensure a strong recovery in our trading profit as and when end-markets show some sustained pick up.”
According to the World Steel Association (WSA), global steel production, which represents around half of the Ceramics division’s revenue, fell 23% in the first quarter of 2009 compared to the same period last year, with decreases in the months of January, February and March of 24%, 22% and 24%, respectively. This reduced level of production is in line with that experienced in the last two months of 2008. Excluding China (which currently accounts for just under half of global steel production), steel production fell by 37% in the first quarter of 2009, with Europe down 44%, the CIS down 34% and NAFTA down 52%.
On April 27, 2009, the WSA published a new short-range forecast for the full year 2009 for apparent steel consumption that forecast a 15% reduction globally, with Europe down 29%, the CIS down 23% and NAFTA down 32%. Around two-thirds of the division’s revenue in the Steel Flow Control and Linings product lines arises in Europe and NAFTA. This reflects both the leading market positions Cookson maintains in these markets and the much higher proportion of steel manufactured in these regions (as compared to emerging markets such as China and India) using enclosed continuous casting technology, which requires the division’s Steel Flow Control products.
The foundry castings market, which represents around one-third of the Ceramics division’s revenue, has similarly experienced weak trading that reflects, in particular, very low levels of light vehicle and heavy truck production. Fused silica markets have also seen reduced demand compared to last year with broadly unchanged revenue for Solar Crucibles™ but significantly lower revenue for glass rollers.
These weak end-markets have resulted in underlying year-to-date revenue (at constant currency and as if Foseco had been acquired with effect from the beginning of January 2008) in the Ceramics division being lower by around 32% compared to last year. Reported year-to-date revenue (at reported exchange rates and including Foseco only from the date of its acquisition on April 4, 2008) is 13% higher than the corresponding period last year, reflecting the reduction in underlying revenue being more than offset by the additional three-month contribution from Foseco and the beneficial impact of currency translation due to the weakness of sterling. There has been some improvement in trading profit for the division as the year progressed despite the weak end-markets as more of the cost-reduction initiatives launched at the beginning of the year were realized. Trading was at breakeven in January and February, with modest levels of trading profit in each of March and April.
All of the key end-markets for the Electronics division (electronics, industrial and automotive) have been very weak for the year to date compared to last year, continuing the trends seen in the last two months of 2008. However, since late March, certain sectors within electronic materials end-markets (which account for two-thirds of the division’s revenue) have shown signs of improvement as customer de-stocking appears to be coming to an end. However, industrial and automotive markets (which account for the other one-third of the division’s revenue) have continued to be weak.
Underlying year-to-date revenue (being revenue at constant currency and adjusted for the impact of lower metal prices) is down by around 40% compared to last year. Reported year-to-date revenue (at reported exchange rates and not adjusting for the impact of lower metal prices) is 24% lower than the corresponding period last year, reflecting the reduction in underlying revenue only partially being offset by the beneficial impact of currency translation due to the weakness of sterling.
Monthly year-to-date trading profit has shown a modestly improving trend, as a result of the recent improvement in electronics end-markets and due to the increasing benefit of cost reduction initiatives enacted in the first quarter. The division traded at breakeven in January and February but recorded a small, and increasing, trading profit in each of March and April.
On January 29, 2009, Cookson detailed two phases of cost-reduction initiatives. Phase I was completed in the fourth quarter of 2008 and Phase II was initiated in early 2009. Together they are expected to generate around £40 million (approximately $61 million) of annualized savings, of which £30 million (~ $46 million) is expected to be realized in 2009. Given the continued weakness in the Ceramic division’s end-markets, a further phase (Phase III) of cost reductions will shortly be launched that is expected to generate approximately £13 million (~ $20 million) of additional annualized savings, of which £5 million (~ $8 million) is expected to be realized in 2009.
Plans for Phase III are still being finalized and are subject to normal employee consultation, but could include the closure of further Ceramics facilities (in addition to the intended closure of six facilities already announced), plus additional overhead reductions. These new initiatives are expected to result in a further reduction in the division’s headcount of up to 600. The cash-related costs of realizing these Phase III savings are expected to total approximately £13 million (~ $20 million), which will be reflected as an additional restructuring charge in 2009.
As a result of these restructuring and integration initiatives, Group headcount by the end of 2009 is expected to be around 3200 lower than at September 2008, a reduction of 19%. Total restructuring and integration costs for 2009, including those related to all three phases of the cost-reduction initiatives and the continuing integration of Foseco, are now expected to be approximately £40 million (~ $61 million). The cash outflow in 2009 relating to restructuring and integration initiatives (including some announced in 2008) is expected to be just under £50 million (~ $76 million).
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 on an assessment of end-market conditions, and these conditions are subject to greater uncertainty than usual in the current economic climate.
Cookson’s major markets have remained very weak in the first four months of 2009 compared to last year, although certain electronics end-markets have seen some increased levels of activity since late March. While the timing and extent of any recovery in these end-markets remains very difficult to predict, Cookson is still expecting a gradual improvement in its trading results going forward, particularly into the second half of the year as further cost-reduction benefits materialize and sales volumes improve as the de-stocking in end-markets comes to an end.
Cookson remains committed to aligning its cost base to the expected level of activity in its end-markets. These initiatives, combined with the realization of further Foseco-related integration synergies, will increasingly benefit the Group’s results as it progresses through 2009. Cookson’s reduced cost-base and the high level of operational gearing in its operations should ensure that its trading results benefit strongly as and when market conditions improve.
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, with leading positions in markets with sound prospects for growth as the global economy recovers.
Additional details are available at www.cooksongroup.co.uk.