Waterford Wedgwood: hard times may force dividend cut

Fine crystal and porcelain producer Waterford Wedgwood might be forced to reduce its dividend, a move considered unlikely until recently by the stock market but which is now looking increasingly possi…

Fine crystal and porcelain producer Waterford Wedgwood might be forced to reduce its dividend, a move considered unlikely until recently by the stock market but which is now looking increasingly possible given falling sales and profits. It was long assumed that as Sir Anthony Wedgwood owns 27% of the company directly or through family trusts, the dividend policy was unlikely to change. However, the recent disappointing sales and profits together with poor prospects for an upturn in the near future have lead some brokers to believe that the company may have to cut its dividend in order to reduce debts. After a profits warning in early March 2003, John Sheehan of NCB stockbrokers said “a further decline in trading would, we believe, seriously undermine the group“s ability to maintain the dividend level”. The company has indicated it will hold the dividend at EUR 0.031 cents for 2003. But given the guidance that earnings will probably be in the range EUR 0.045 cents to EUR 0.05 cents, this means the dividend is covered less than two times. Waterford Wedgwood has grown impressively, with earnings almost doubling between 1997 and 2000 before the sharp adjustment in 2001 in the wake of the 11 September World Trade Center attacks. Brokers say markets are now more focused on balance sheets. “There would be a perception that Waterford“s cash management has not been that good,” says Joe Burnell, analyst with Davy stockbrokers. The full year figures, scheduled for 4 June 2003, look like being “the third year in a row the company has disappointed,” says Mr Burnell. Until 2001, sales and profits had been rising steadily; however, so had net debt, while the operations failed to produce much cash. In fact the cumulative free cash flow before dividend payments between 1996 and 2000 was only EUR 31 million ( GBP 20 million). In the past two years, much of the earnings has been channeled into acquisitions or restructuring costs. Davy, the company“s broker, is forecasting net debt to go down by about EUR 30 million from EUR 390 million in March 2002 to about EUR 360 million. However much of this is the result of a one-off currency adjustment due to the strength of the US dollar. In the long term, the challenge for Waterford Wedgwood is how to generate more cash from the business. CEO Redmond O“Donoghue, says that in running a business there is always a balancing act between cash and earnings. “We could flatter the figures by putting more volume through our factories, in that way absorbing more of our fixed costs. Our inventory would go up, and our cash performance would be poorer. But we have set our face against doing that. The market“s in a different place than it was three years ago, when it was all earnings, earnings, earnings.” Luxury goods companies always face the problem of high inventory costs associated with producing high value items, usually with long distribution chains. Waterford Wedgwood seems to have a greater percentage of its sales tied up in capital and finished goods than its main competitors. Part of the problem is the number of separate products or stock keeping units(SKUs) as they are know. Crystal maker Waterford, depends on 500 SKUs for 80% of sales. At All-Clad, the US-based kitchen equipment division, the number is about 300. But at both Wedgwood and Rosenthal, its German tableware business, the list of SKUs is 13,000. “Part of the problem is killing off the old ones, which is something we haven“t done very well,” admits Mr O“Donoghue. “We have to be more ruthless.” The transition from an old-fashioned tableware producer to a gift manufacturer will help the process. In Japan, for example, a Wedgwood cup and saucer has become a gift item. “The Japanese market taught us something we didn“t know. “Normally it would be sold as a five-piece place setting. But in Japan, every occasion is an opportunity to give a gift. They give gifts at funerals, at weddings to their guests. Employees give gifts to their boss,” says Mr O“Donoghue. There has been a similar switch in the crystal business. Fifteen years ago, the company would have relied on traditional glass or stemwear for 70% of sales revenue. A well known range such as Lismore would have included 15 different glasses from liqueur to sherry glasses and everything in between. Now there would be just five glasses. Now only a quarter of Waterford sales come from stemwear, as the company diversifies into one-off designer products like the USD 100 crystal dog bowl. Reducing the number of SKUs is a long-term project, and there are practical limits in a business where there is constant pressure from the consumer to come up with new items. “If I were anonymously to go into Maceys or Bloomingdales, the question you would hear being asked of the sales staff, is whats new. If the answer is nothing, people are not going to be very impressed,” says Mr O“Donoghue. The period from January to March would normally see the main US stores restocking after the Christmas sales. However with Federated, which owns US department stores Maceys and Bloomingdales, reporting lower activity, Waterford Wedgwood sales in the 11 months to end of February 2003 were down 4.5% in local currency terms.