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The group has seen progressively improving trends in electronics end-markets since March, as well as some signs of recovery in steel production end-markets since May, though foundry end-markets remain very weak. These improving overall trends continued through the third quarter, which also benefitted from the normal trading seasonality of the Electronics and Precious Metals divisions and a slight pick-up in foundry markets toward the end of the quarter.
As a result, group revenue of £498 million (approximately $825 million) in the third quarter was 9% higher than the prior quarter at constant exchange rates (6% higher at reported exchange rates), although still 26% below the equivalent quarter in 2008 (18% lower at reported exchange rates). Trading profit improved markedly in the third quarter, reflecting the strong profit drop-through from the additional revenue and the incremental cost-reduction program savings.
These improving overall end-market and trading performance trends have continued into the fourth quarter, although the group anticipates the normal reduction in activity in December due to some customer production shutdowns. The board now expects trading profit for the full 2009 year to be around the upper end of the range of current analysts’ forecasts. The group is therefore confident that it will be in full compliance with the financial covenants contained within its debt facilities as of December 31, 2009.
Third quarter revenue in the Ceramics division was £279 million (~ $462 million), 7% higher than the prior quarter at constant exchange rates (4% higher at reported exchange rates), although still 31% below the equivalent quarter in 2008 (24% lower at reported exchange rates). As anticipated, trading profit was substantially higher than in the second quarter due to the strong profit drop-through on the additional revenue-most notably from the steel-related product lines-combined with the increased capture of cost savings from the facility closures and downsizings announced earlier in the year.
Trading profit in September showed a strong improvement as the summer vacation season ended and steel-related end-markets continued their recovery. According to the World Steel Association, global steel production, which represents just over half of the Ceramics division’s revenue, fell 6% in the third quarter of 2009 compared to the equivalent quarter last year. Steel production in China (which now currently accounts for just under half of global steel production) was 21% higher. However, market trends outside China are more significant for the Ceramics division in the short-term, as over 80% of the Steel Flow Control and almost all of the Linings product line revenue arises outside China. Excluding China, global steel production was 22% lower in the third quarter compared to the equivalent period last year, but 13% above the prior quarter.
Excluding China, the level of steel production in September was 20% higher than the average monthly production in the first half of 2009, with increases in all key regions: NAFTA up 23% (U.S. up 32%); the European Union up 28%; and CIS up 10%. The group believes that this increase in steel production marks the end of the de-stocking phase and the progressive realignment of steel production to underlying demand.
Revenue in Steel Flow Control (for which global steel production represents almost 100% of the end-market) grew by 17% in the third quarter compared to the second quarter (at constant exchange rates). Linings revenue, as expected, grew less markedly in the third quarter (a 2% increase at constant exchange rates). Linings was less affected in the first half of 2009 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 in the first half from an order backlog of maintenance projects. Revenue in both product lines is still well below the third quarter of 2008: 26% lower for Steel Flow Control and 28% lower for Linings (both at constant exchange rates). Trading profit in Steel Flow Control grew very strongly in the third quarter compared to the second quarter, in line with the group’s previous expectations, while trading profit in Linings was broadly unchanged between the two quarters.
The foundry castings market, which represents around one-third of the Ceramics division’s revenue, continues to experience weak trading, although activity did start to pick up slowly toward the end of the third quarter. Foundry revenue in the second quarter of 2009 was 13% lower than the first quarter, but this trend has been reversed in the third quarter with revenue 6% higher compared to the second quarter. While encouraging, revenue in the third quarter was still 37% lower than the third quarter of 2008 (at constant exchange rates). Foundry reported a modest trading profit for the third quarter, compared to breakeven levels in the second quarter.
Fused Silica end-markets have continued to be weak, with revenue in the third quarter down 12% on the second quarter (at constant exchange rates) and reduced demand for both Solar Crucibles™ and tempering rollers used in the glass industry. Notwithstanding the weak revenue, this product line has remained profitable in the third quarter.
Electronic Materials end-markets (which account for approximately two-thirds of the division’s revenue) have continued to improve throughout the third quarter, a trend that commenced in March 2009 as customer de-stocking started to come to an end. However, industrial and automotive markets (approximately one-third of the division’s revenue) have remained weak.
Revenue of £145 million (~ $240 million) in the third quarter was 5% higher than the prior quarter on an underlying basis (revenue at constant exchange rates, adjusted for the impact of differences in commodity metal prices and eliminating back-to-back customer equipment sales), but still 18% lower than the equivalent quarter last year (15% lower at reported exchange rates and not adjusting for metal prices or customer equipment sales). Monthly trading profit in the third quarter showed an improving trend, particularly in September as the summer vacation period ended and the division entered into its peak seasonal period.
The improving overall end-market and trading performance trends have continued into the fourth quarter, although the group anticipates the normal reduction in activity in December due to some customer production shutdowns. The board now expects trading profit for the full 2009 year to be around the upper end of current analysts’ forecasts.
Trading performance in 2010 will be dependent on the speed and strength of the recovery in the global economy and in the group’s key end-markets of steel production, foundry castings and electronics, which remain difficult to predict with any certainty. Given the actions the group has taken over the past year, it believes it is well-positioned once a sustained recovery in end-markets is confirmed.
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