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Cookson Group PLC
02 March 2010
2 March 2010
COOKSON GROUP PLC
ANNOUNCEMENT OF 2009 FULL YEAR RESULTS
HIGHLIGHTS
· Revenue of £1,961m (24% lower than 2008 on an underlying basis1) showing strongly improving trend with H2
underlying
revenue1 13% higher than H1
· Cost reduction programme successfully completed - annualised savings of over £65m.
· Trading profit of £111.7m, of which 85% (£95.2m) was earned in H2
· Return on sales margin recovered to 9.2% in H2 (Ceramics H2 10.1%; Electronics H2 11.3%), versus 1.8% in H1
· Pre-tax exceptional charges of £96.6m as expected, related primarily to restructuring
· Free cash flow of £73m in H2, significantly exceeding expectations (full year 2009: £157m)
· Net debt reduced by £360m to £371m at year end, through rights issue in March 2009 and strong actions to reduce
working capital (reduced by £153m) and conserve cash
· Improvements in steel and electronics end-markets have continued so far into 2010
1 Being revenue at constant currency; as if Foseco had been acquired on 1 January rather than 4 April 2008; adjusted
for
the impact of differences in commodity metal prices; and eliminating back-to-back customer equipment sales
2009 2008 Reported rates Constant rates
Revenue £1,961m £2,203m (11)% (21)%
Trading profit¹ £111.7m £216.3m (48)% (54)%
Return on sales¹ 5.7% 9.8% (4.1)pts (4.1)pts
Profit/(loss) before tax - headline¹ £75.7m £176.2m £(100.5)m
- basic £(20.9)m £89.6m £(110.5)m
Tax rate - headline² 35.2% 27.5% (7.7)pts
Earnings per share3,4 - headline¹ 18.0p 88.5p (70.5)p
- basic (17.8)p 32.7p (50.5)p
Dividends per share3,5# - 8.8p (8.8)p
Free cash flow¹ £157.3m £73.1m up £84.2m
Net debt¹ £371.4m £731.7m down £360.3m
Free cash flow¹
£157.3m
£73.1m
up £84.2m
Net debt¹
£371.4m
£731.7m
down £360.3m
¹#Refer to Note 1 of the attached financial statements for definitions
² Tax rate on headline profit before tax (before share of post-tax profit of joint ventures)
³ As restated for the effect of the share consolidation in May 2009
4 Continuing operations only
5Dividends are presented on an "as declared" basis
Commenting on the Group's results and outlook, Nick Salmon, Chief Executive, said:
"Trading profit for 2009 was in line with the guidance given in November. Cash generation however was particularly
strong
due to an excellent performance throughout the Group in managing working capital.
"The improvement in steel production and electronics end-markets experienced in the second half of 2009 has continued so
far into 2010. Customer shutdowns at year-end reverted to a normal pattern, as compared to the prolonged shutdowns a
year
earlier.
"We have leading market positions supplying products and services to essential industries and a well balanced global
market
presence with significant exposure to higher-growth emerging markets. Our cost base has been considerably reduced over
the
last 18 months and hence performance should continue to recover significantly as end-markets improve."
OVERVIEW
Summary of Group results
Following the rapid decline in all our end-markets in the last quarter of 2008, we experienced very difficult trading
conditions through the first half of 2009. According to World Steel Association (WSA) statistics, global steel
production
outside China, our largest end-market, recorded volumes down 35% for the first six months of 2009. This acute downturn
was
caused by a significant reduction in steel inventories throughout the supply chain from producers to end-users
("de-stocking") such that steel production declined much more than the decline in underlying demand. We believe that
the
de-stocking phase ended in the second half of 2009 but as yet re-stocking is limited, as evidenced by low levels of
steel
inventories reported in most regions. De-stocking has had a similar impact on our other main end-markets of foundry
castings and electronics. Our underlying revenue for the first six months of 2009 was down by one third compared with
the
same period in 2008.
We saw the first tentative signs of recovery in electronic materials markets starting in late March followed by global
steel production outside China increasing slowly since May. Whilst these markets continued to improve through the
second
half of the year as the de-stocking ended and production levels rose to match underlying demand, by year-end they still
remained well below the levels seen in recent years. The other main end-market, foundry castings, remained weak
throughout
the year indicating that the de-stocking phase for castings was not yet over. Underlying Group revenue improved by 13%
in
the second half of 2009 compared with the first half and full year revenue of £1,961m was 24% below 2008.
Trading profit in 2009 reduced significantly to £111.7m, a decrease of 54% at constant exchange rates. The majority of
this, £95.2m, was earned in the second half, reflecting the increased revenue and the progressive benefits from the
significant cost reduction programmes initiated in late 2008 and early 2009. The return on sales margin recovered to
9.2%
for the second half of 2009 compared to 1.8% for the first six months.
Headline profit before tax decreased by 57% to £75.7m. Headline earnings per share were down 80% to 18.0p. Pre-tax
exceptional charges totalled £96.6m, mainly related to one-off restructuring costs, leading to an overall reported loss
for
the year of £44.7m. The restructuring programmes reduced our workforce by almost 3,000 people (nearly 20%) and they are
estimated to have reduced the annual cost base by over £65m.
Net debt at 31 December 2009 was £371m, a reduction of £360m from a year earlier reflecting the £241m net proceeds from
the
rights issue received in March and the strong actions taken to reduce working capital (reduced by £153m) and conserve
cash.
Research and development spending, however, was maintained at normal levels (being £35m in 2009, unchanged from 2008
at
constant exchange rates). The net debt to EBITDA ratio, as calculated for bank covenant purposes, was 2.3 times as at
31
December 2009.
The net liability for employee post-retirement benefits at 31 December 2009 was £138m, an increase of £6m since 30 June
2009. Further steps are being taken to reduce and de-risk this liability. Employees are being consulted regarding the
proposed closure of the UK defined benefit plan to future benefit accrual, as has already been implemented for the main
US
defined benefit plans. Also in the US, steps are being taken to terminate certain retiree medical arrangements.
No interim dividend was paid during the year and the Board is not recommending a final dividend to shareholders in
respect
of 2009. A decision to resume dividend payments will be made once we can see a sustained recovery in our end-markets
and
trading performance, and in the context of the Group's indebtedness and cash requirements at that time.
Ceramics division
On an underlying basis (at constant currency and as if Foseco had been acquired on 1 January rather than 4 April 2008),
revenue was 35% lower in the first half of 2009 compared with 2008 but then increased by 11% in the second half compared
to
the first half of 2009. This increase was mainly due to higher sales in the Steel Flow Control product line where
second
half revenue exceeded that in the first half of 2009 by 29%, in line with steel production trends in our key markets.
Full
year revenue of £1,131m was down 28% on an underlying basis. Trading profit (at reported rates) decreased from last
year
by 58% to £70.9m, giving a return on sales margin of 6.3% compared with 13.3% in 2008. The majority of the trading
profit, £59.5m, was earned in the second half with strong profit drop-through from the additional revenue and increased
benefit of cost savings from facility closures and headcount reductions. The return on sales margin in the second half
increased to 10.1%.
For the four product lines, revenue for the year and underlying change compared to 2008 were as follows: Steel Flow
Control
£366m, down 25%; Linings £388m, down 21%; Foundry £320m, down 37%; and Fused Silica £57m, down 29%.
Electronics division
Full year revenue of £530m was 20% lower than in 2008 on an underlying basis (at constant currency and commodity metals'
prices and eliminating back-to-back equipment sales). Underlying revenue was 32% below the 2008 level in the first half
but then increased by 19% in the second half compared to the first half of 2009 reflecting both improved trading
conditions
and normal seasonality. Revenue trends were similar in both the Assembly Materials and Chemistry product lines.
Trading
profit decreased from last year by 24% to £39.2m, giving a return on sales margin of 7.4% compared with 8.3% in 2008.
The
majority of the trading profit, £32.9m, was earned in the second half due to the strong profit drop-through from the
additional revenue, the increased benefit of cost savings and a more profitable revenue mix, with increased sales of
higher
margin innovative products such as halogen-free and lower melting point solder pastes and semi-conductor copper
damascene.
The return on sales margin in the second half was 11.3%.
Precious Metals division
Net sales value of £133m was unchanged from the prior year at constant exchange rates. Weaker retail jewellery markets
were offset by further increases in reclaim activity in Europe and gold coin blank production in the US, both stimulated
by
the high price of gold. The trading profit of £8.9m was almost double that reported in 2008 as a result of the high
level
of reclaim business in Europe, particularly in Spain, and the restructuring measures implemented in the US in the early
part of the year.
Priorities for 2010
Our current focus is on maximising the performance of all our businesses as markets recover. Specific priorities
include:
· continued tight control of costs and working capital as activity levels increase;
· investment in further production capacity and people in our fastest growing markets such as China and India;
· continued R&D investment to further expand our portfolio of higher technology products; and
· further reduction and de-risking of our post-retirement benefit obligations.
Outlook
The improvement in steel production and electronics end-markets experienced in the second half of 2009 has continued so
far
into 2010. Customer shutdowns at year-end reverted to a normal pattern, as compared to the prolonged shutdowns a year
earlier.
Whilst the outlook for global economic growth is uncertain, we currently expect steel production and electronics
end-markets to grow progressively through 2010, but at a slower rate than in the second half of 2009 when growth was
enhanced by the end of de-stocking. The outlook for the "later cycle" foundry castings market continues to be unclear,
given we have yet to see sustained evidence of recovery. Precious metals markets are expected to remain at similar
levels
to 2009. Our cost base has been considerably reduced over the last 18 months and hence performance should continue to
recover significantly as end-markets improve.
OPERATING REVIEW
Note: the data provided in the tables below are at reported exchange rates.
Group
Revenue (£m) Trading Profit (£m) Return on Sales (%)
2009 2008 2009 2008 2009 2008
First half 929 1,058 16.5 113.3 1.8 10.7
Second half 1,032 1,145 95.2 103.0 9.2 9.0
Year 1,961 2,203 111.7 216.3 5.7 9.8
5.7
9.8
2009 was marked by a progressive recovery in the performance of the Group's businesses, albeit still not back to the
levels
experienced prior to the onset of the global economic crisis. The first quarter of 2009 saw a continuation of the
trends
in the fourth quarter of 2008, when the Group experienced a rapid and significant softening in its end-markets,
including
an unprecedented reduction in global steel production, combined with weaker automotive and consumer electronics markets.
Despite these difficult trading conditions, the prompt action taken to reduce the Group's cost base enabled trading
profit
to remain at break-even during the first quarter of 2009. As the year progressed, a number of the Group's key
end-markets
started to pick up, notably electronics end-markets since late March and global steel production end-markets since May.
This, combined with the increased benefit of cost savings as a result of management action across all three divisions,
meant that the Group's trading results improved each quarter as the year progressed.
Group revenue in 2009 of £1,961m was 21% lower than 2008 at constant exchange rates and down 11% at reported exchange
rates. Underlying revenue (being revenue at constant currency; as if Foseco had been acquired on 1 January rather than
4
April 2008; adjusted for the impact of differences in commodity metal prices; and eliminating back-to-back customer
equipment sales) was 24% lower than 2008. In the first half, underlying revenue was 32% lower than in 2008 but with the
gradual improvement in a number of the Group's key end-markets as the year progressed, combined with easier comparatives
for the fourth quarter, underlying revenue in the second half was 15% lower than the second half of 2008. Notably,
underlying revenue in the second half of 2009 was 13% higher than the first half of 2009. Revenue for the Group was
well
balanced geographically with 39% coming from the Group's operations in Europe, 27% from Asia-Pacific, 27% from NAFTA and
7%
from Rest of the World.
Trading profit in 2009 reduced significantly to £111.7m, a decrease of 54% at constant exchange rates and 48% at
reported
exchange rates. The majority of the trading profit, £95.2m, was earned in the second half, with only £16.5m earned in
the
first half. Trading profit for 2009 (at constant exchange rates) in the Ceramics and Electronics divisions was down 62%
and
35% respectively from 2008, whilst trading profit in the Precious Metals division almost doubled (up by £3.8m).
The return on sales margin in 2009 decreased to 5.7% from 9.8% for 2008 (at reported exchange rates). Encouragingly,
the
return on sales margin in the second half of 2009 was 9.2% (first half 2009: 1.8%).
Headline profit before tax decreased by 57% to £75.7m. Headline earnings per share were down 80% to 18.0p, reflecting
the
lower profitability and an 80% increase in the weighted average number of shares as a result of the rights issue in
March
2009.
Exceptional charges (net of tax), excluded from headline results, totalled £90.7m, principally relating to the one-off
costs associated with the cost-reduction programmes implemented in all three divisions. A first phase of immediate
measures was executed in the last quarter of 2008. Further steps were initiated through the first half of 2009, the
majority of which were completed by the third quarter. These included the permanent closure of eight manufacturing
facilities and the substantial downsizing of three others together with significant cuts in production and overhead
headcount, mainly in Europe and North America. Over the same period the integration of Foseco (acquired in April 2008)
was
successfully completed, delivering cost savings in excess of the original target. Altogether these measures reduced
Group
headcount by almost 20% and reduced the annual cost base by over £65m compared to the September 2008 level.
Net debt as at 31 December 2009 was £371m, a £360m reduction from the £732m as at 31 December 2008. This significant
decrease arose from both the £241m net proceeds from the rights issue in March and from strong cash generation resulting
from the actions taken to conserve cash. These included programmes to reduce levels of working capital, tight control
of
capital expenditure, and the suspension of dividends and UK pension 'top-up' contributions. The net debt to EBITDA
ratio
(as calculated for bank purposes) was 2.3 times as at 31 December 2009 (compared to the bank covenant requirement of not
more than 3.5 times).
Ceramics division
Trading under the Vesuvius and Foseco brand names, the Ceramics division is the world leader in the supply of advanced
consumable products and systems to the global steel industry (approximately 55% of the Ceramics division's revenue) and
foundry industry (approximately 33% of the Ceramics division's revenue) and a leading supplier of speciality products to
the glass and solar industries.
Revenue (£m) Trading Profit (£m) Return on Sales (%)
2009 2008 2009 2008 2009 2008
First half 543 582 11.4 85.1 2.1 14.6
Second half 588 682 59.5 82.6 10.1 12.1
Year 1,131 1,264 70.9 167.7 6.3 13.3
6.3
13.3
The Ceramics division experienced very difficult trading conditions during the year although steel production
end-markets
did show some improvement in the second half. Revenue of £1,131m was 11% lower than for 2008. On an underlying basis
(at
constant exchange rates and as if Foseco had been acquired on 1 January 2008), revenue was down 28%. Underlying revenue
was 35% lower in the first half of 2009 compared with 2008, but with the improvement in steel-related product lines as
the
year progressed increased by 11% in the second half compared to the first half of 2009.
Trading profit in 2009 reduced significantly to £70.9m, a decrease of 62% at constant exchange rates and 58% at reported
exchange rates. The majority of the trading profit, £59.5m, was earned in the second half due to the strong profit
drop-through on the additional revenue - most notably from the steel-related product lines - combined with the increased
benefit of cost savings from facility closures and restructuring. The return on sales margin was 6.3% (compared to
13.3%
in 2008) with margins of 2.1% in the first half of 2009 and 10.1% in the second half.
Following the restructuring and integration initiatives in the first three quarters of 2009, there has been some
re-manning
of production facilities in the fourth quarter as activity levels increased and, as a result, Ceramics headcount at the
end
of December 2009 was around 1,900 lower than at September 2008, a reduction of 15%.
Global steel production is the division's main end-market corresponding to a little over half of its total revenue.
According to the WSA, global steel production in 2009 was 1.2 billion tonnes, 8% lower than for 2008. Within this
total,
steel production in China (which now currently accounts for just under half of global steel production) was 13% higher.
However, market trends outside of China are more significant for the Ceramics division in the short-term as China
currently
accounts for less than 10% of the division's steel-related revenue. In the Steel Flow Control product line, for which
global steel production represents almost 100% of the end-market, China represents slightly less than 20% of total
global
revenue as the majority of steel production in China is not currently based on the enclosed continuous casting
technology
which uses Vesuvius's flow control products. Whilst there is significant installed capacity for the production of
'flat'
steel which uses Vesuvius's products, currently around 70% of actual steel production is for 'long' products (which are
typically used in construction and rail applications) which require significantly less flow control products. The use
of
enclosed continuous casting is expected to increase over time as the Chinese steel industry continues to modernise and
demand for 'flat' steel product increases. In the Linings product line, for which steel production represents around
two-thirds of the end-market, there is only modest revenue arising in China as yet as this market has only recently been
addressed, but this business is expected to grow over the coming years with the newly-formed Angang Vesuvius
Refractories
joint venture.
Excluding China, steel production in 2009 was 22% lower than 2008; 35% lower in the first half and 7% lower in the
second
half when compared to the equivalent halves in 2008. Following the unprecedented collapse in steel production in the
fourth quarter of 2008, steel production (excluding China) in the first quarter of 2009 remained depressed with
production
down 37% compared to the corresponding quarter in 2008. However, since May, production levels have improved steadily
such
that production (excluding China) was 32% higher in the fourth quarter of 2009 compared to the first quarter of 2009
with
increases in all key regions. This increase in steel production is believed to mark the end of the de-stocking phase
and
the progressive realignment of steel production to underlying demand. Whilst this improvement in steel production is
encouraging, production levels in most regions are still significantly lower than levels seen in recent years. For
example, global production (excluding China) in the fourth quarter of 2009 represented only 82% of the production levels
seen in the second quarter of 2008.
The foundry castings market, which represents around one-third of the division's revenue, produces castings which are
used
in a wide variety of engineering products. Approximately 40% of castings (and therefore a similar percentage of the
revenue for the Foundry product line) relate to the vehicle sector, being 25% for cars and light trucks and 15% for
heavy
trucks. Other end-markets for foundry castings include construction, agriculture and mining machinery; power generation
equipment, pipes and valves; railroad and general engineering equipment. The foundry castings market deteriorated
significantly towards the end of 2008 with the unprecedented reduction in automotive and heavy truck production
(particularly in the US and Europe) and the widespread cut in production of other engineering products.
For light vehicles, for example, this trend continued throughout the first half of 2009 with JD Power statistics showing
production of light vehicles in the first half of 2009 (compared to the corresponding period in 2008) being down 33% in
Western Europe, 50% down in North America and 30% down in the rest of the world (excluding China). In the second half
of
2009, production levels of light vehicles improved, stimulated by government sponsored vehicle replacement schemes in a
number of countries including the US, Germany and the UK. As a result, light vehicle production for the year as a whole
was down 19% in Western Europe, 32% down in North America and 17% down in the rest of the world (excluding China).
Whilst
the level of global vehicle production did recover in the second half of 2009 this is yet to have a significant impact
on
revenue due to de-stocking through the supply chain. Global truck production has remained at very low levels throughout
2009, being 30% lower than in 2008. The other end-markets mentioned above also typically exhibit more "late cycle"
characteristics and are yet to show signs of a pick-up.
The principal products in the Fused Silica product line are tempering rollers used mainly in the production of glass for
construction and automotive applications, and Solar Crucibles which are used in the production of photovoltaic ("solar")
panels. Both products have experienced very difficult trading conditions during the year with weak end-market demand
exacerbated by a sharp de-stocking of solar panels, particularly in China. However, the fourth quarter of 2009 did see
some small improvement in the demand for Solar Crucibles indicating that the de-stocking phase for solar panels was
probably coming to an end.
Note: in the product line analysis below for the Ceramics division, all of the financial information is presented on an
'underlying' basis i.e. at constant currency and as if Foseco had been acquired with effect from 1 January 2008.
References to profitability of individual product lines refers to the relative contribution they make to the trading
profit
of the division before centralised divisional costs.
Steel Flow Control
The Steel Flow Control product line provides a full range of products and services to control, regulate and protect the
flow of steel in the enclosed continuous casting process. Products include VISO and VAPEX products, slide-gate and tube
changer systems and refractories, gas purging and temperature control devices, and mould and tundish fluxes.
Global steel production represents almost 100% of the end-market for Steel Flow Control products and services.
Underlying
revenue in Steel Flow Control of £366m fell by 25% compared to 2008, broadly in line with the reduction in steel
production
in the key markets in which Vesuvius operates. Underlying revenue in the first half of 2009 was 38% lower than the
first
half of 2008 but increased 29% in the second half. Underlying profit contribution reduced by nearly half compared to
2008
with a small contribution in the first half but a more substantial contribution in the second half as steel production
started to increase and more cost-savings were captured. There was strong profit contribution drop-through on the
additional revenue and the contribution margin in the second half of 2009 was broadly consistent with that achieved in
full
year 2008.
The cost-cutting measures noted above include the permanent closure of three steel flow control facilities, namely
Newmilns
in the UK, Fisher (Illinois) in the US and Emmerich in Germany.
Production from the additional production line in Ostend, Belgium, which became operational at the end of 2008,
increased
gradually during the year. Production of some Steel Flow Control products has been reallocated from our other European
factories to this automated facility to yield significant overall productivity gains. Projects are ongoing during 2010
to
increase capacity in our Chinese and Indian facilities in order to meet the continuing growth in demand in these
countries.
Linings
Linings includes products and services that enable our customers' plants to withstand the effects of extreme
temperatures
or erosive chemical attack. The business manufactures castables, gunning materials, ramming mixes, pre-cast shapes, tap
hole clay, bricks, mortars, and provides construction and installation services.
Global steel production represents around 70% of the end-market for Linings products and services with the remainder
arising from a variety of non-steel markets including the cement, lime, aluminium, power generation, petrochemical and
waste incineration industries.
Underlying revenue in the Linings product line fell by 21% to £388m. This principally reflected the reduced level of
maintenance and new-build activity in the steel industry, as steel production levels fell sharply - particularly in the
first half of the year - and a number of customer facilities were temporarily closed. The level of activity in
non-steel
markets was also relatively subdued as a result of the global economic downturn. This product line is more
project-based
than the others and therefore benefited in the first half of the year from an order backlog of maintenance projects.
Underlying revenue was 25% lower in the first half of 2009 and 16% lower in the second half of 2009 (when compared to
the
equivalent halves in 2008). Underlying revenue in the second half of 2009 was 5% higher than the first half of 2009, a
less marked improvement than for Steel Flow Control as some of the order backlog was worked down.
Underlying profit contribution fell by just under half compared to 2008, with a small contribution in the first half of
the
year but an increased contribution in the second half, due to the increased benefit of cost-savings and the marginally
higher revenue. The contribution margin in the second half of 2009 was only one percentage point lower than for full
year
2008.
As part of the cost-cutting measures noted above, two linings facilities were closed permanently by the end of the third
quarter of 2009, namely Hautrage in Belgium and Brownsville (Texas) in the US, and the pre-cast monolithic activities at
the facility in Conneaut (Ohio) have either been discontinued or transferred to another facility.
The terms of the 50/50 Linings joint venture with Anshan Iron and Steel Corporation Group ("Angang"), one of China's
largest steel producers, were finalised in July 2009. Production from a newly-built facility, of which Vesuvius' share
of
the investment was £5m, commenced progressively in the second half of 2009, thereby enhancing our linings capacity in
this
important region.
Foundry
The Foundry product line is a leading supplier of products and services to the foundry industry worldwide and trades
under
the Foseco brand name. Products include feeding systems, filters, metal treatments, metal transfer systems, crucibles,
stoppers, sand binders, coatings and moulding materials.
Underlying revenue in the Foundry product line fell by 37% to £320m in 2009 reflecting the very significant decrease in
global casting production and as de-stocking took place throughout the supply chain. Underlying revenue was 42% lower
in
the first half of 2009 and 32% lower in the second half of 2009 when compared to the equivalent halves in 2008. The
significant fall in revenue started slightly later than for the Steel Flow Control product line and, whilst revenue
levels
did start to pick up slowly towards the end of the third quarter, there has not yet been the same level of recovery in
revenue as has been evident in the steel-related product lines. As a result underlying revenue in the second half of
2009
was only very marginally ahead of the first half of 2009 (up 3%), reflecting the more 'late cycle' characteristics of
the
end-markets.
Foundry's profit contribution for the year was over 80% lower than for 2008. The profit contribution was just above
break-even in the first half with some modest improvement in the second half, notwithstanding the broadly unchanged
revenue, due to the increased benefit of cost-savings.
As part of the series of cost-cutting measures noted above, the foundry facilities in Tlalnepantla, Mexico and Chehalis
(Washington), US were closed permanently in 2009 and the Halifax, UK facility closed in early 2010.
Fused Silica
The principal products in the Fused Silica product line are Solar Crucibles used in the manufacture of photovoltaic
("solar") panels and tempering rollers used in the glass industry.
Underlying revenue fell by 29% to £57m in 2009, with difficult market conditions in both principal end-markets.
Solar Crucible revenue fell by 17% in 2009 reflecting a severe de-stocking of solar panels, particularly in China.
Revenue
in the third quarter was particularly weak although some modest improvement in revenue was seen in the fourth quarter as
the de-stocking phase appeared to be coming to an end and, as a result, underlying revenue for Solar Crucibles in the
second half of 2009 was 5% lower than for the first half of 2009.
Revenue for tempering rollers and other speciality products used in the manufacture of glass fell 39% in 2009 due to
weakness in the construction and automotive sectors. Underlying revenue in the second half of 2009 was 17% lower than
for
the first half of 2009.
The Fused Silica product line reported a small profit contribution for the year, over 70% lower than for 2008. The
contribution improved slightly in the second half due to the increased benefit of cost-savings more than offsetting the
lower revenue.
To better align production capacity with end-market demand for Solar Crucibles, the facility in Hautrage, Belgium was
closed permanently and headcount at the facility in Feignes, France, was reduced by around one-third. Production at the
factory in Wei Ting, China was halted for a period in mid-year due to market conditions but recommenced in the third
quarter.
Electronics division
The Electronics division is a world leading supplier of consumable electronic assembly materials (the Assembly Materials
product line) and advanced surface treatment and electro-plating chemicals (the Chemistry product line).The principal
end-market is global electronics production ("electronic materials"), which accounts for approximately two-thirds of the
division's revenue. Industrial and automotive markets make up the remaining one-third of revenue.
Revenue (£m) Trading Profit (£m) Return on Sales (%)
2009 2008 2009 2008 2009 2008
First half 240 321 6.3 29.9 2.6 9.3
Second half 290 299 32.9 21.8 11.3 7.3
Year 530 620 39.2 51.7 7.4 8.3
7.4
8.3
Revenue for 2009 was £530m, 25% lower at constant exchange rates (15% lower at reported exchange rates) when compared to
2008. The lower revenue partially reflects the 'pass through' to customers of lower tin and silver prices, the Assembly
Materials product line's major raw materials. In 2009, the average prices of tin and silver were respectively 31% and
6%
lower than for 2008, such that approximately £42m of the division's revenue decrease was as a result of these lower
metal
prices. Excluding both the impact of lower metal prices in Assembly Materials, and precious metal sales and
back-to-back
electro-plating equipment sales in Chemistry, underlying revenue was 20% lower than 2008 (at constant exchange rates).
The
slowdown in demand started in the last quarter of 2008 and reflected both a weakening in end-markets (notably for
consumer
electronics and automotive) and a marked de-stocking of components and finished products within the supply chain.
However,
since late March, electronic materials end-markets progressively improved as customer de-stocking came to an end and
end-markets recovered. According to Henderson Ventures, electronic equipment production worldwide, which had
experienced
high single-digit annual growth rates in the five years preceding the downturn in late 2008, reduced by 11% by value in
2009 compared to 2008. Two of the key products within the consumer electronics market are mobile phone handsets and
personal computers. Mobile phone handset volumes were down 3% compared to 2008 (following 7% growth in 2008) whilst
personal computer volumes, including laptops and netbooks, were up 5% compared to 2008 (following 8% growth in 2008).
Industrial and automotive end-markets remained generally weak throughout 2009.
Underlying revenue was 32% lower in the first half of 2009 compared with the first half of 2008 but then increased 19%
in
the second half compared to the first half of 2009, reflecting both the improvement in trading conditions and also the
normal seasonality of the business.
Trading profit in 2009 reduced to £39.2m, a decrease of 35% at constant exchange rates and 24% at reported exchange
rates.
The majority of the trading profit, £32.9m, was earned in the second half of the year due to the strong profit
drop-through
on the additional revenue complemented by a better "mix" of sales of higher margin products such as solder pastes and
copper damascene, as well as the increased benefit of cost savings. The return on sales margin was 7.4% (compared to
8.3%
in 2008) with margins of 2.6% in the first half of 2009 and 11.3% in the second half. If metal prices in 2009 had been
at
similar levels to those in 2008, the return on sales margin would have been approximately half a percentage point less.
Asia-Pacific, the division's largest region, accounted for 43% of revenue in 2009 (by location of customer), broadly in
line with 2008.
As a result of the cost reduction measures the total headcount reduction by December 2009 compared to September 2008 was
around 400 people, 12% of the total workforce. The largest impact has been in the European operations.
Note: references to profitability of individual product lines below refers to the relative contribution they make to the
trading profit of the division before centralised divisional costs.
Assembly Materials
Assembly Materials is a leading global supplier of materials to assemblers of printed circuit boards ("PCBs") and the
semi-conductor packaging industry (together accounting for approximately 65% of Assembly Materials' revenue) and to
certain
non-electronics markets such as plumbing, automotive and water treatment. Its products include solder (which is
available
in bar, wire, paste, powder and sphere form) and fluxes, adhesives, cleaning chemicals and stencils.
Revenue for the year at £308m was 29% lower than 2008 at constant exchange rates (20% lower at reported exchange rates).
Excluding the impact of passing through lower tin and silver prices in 2009, underlying revenue was 22% lower than last
year (at constant exchange rates) reflecting the significant slowdown in the production of electronic equipment which
started in the fourth quarter of 2008, combined with the continuation of the strategy to focus on higher margin, more
value-added products and reduce sales of more commoditised products. For solder products, sales of higher margin, more
value-added products such as solder paste were less affected, with volumes unchanged between years, whereas volumes for
the
more commoditised products such as bar solder were down 30%. This trend reflected the continuing shift from wave
soldering
to surface mount technology for the production of PCB's. The recycling, reclaim business has continued its recent
volume
growth, particularly in China where the new facility in Guangxi Province became operational at the end of 2008.
Underlying revenue was 33% lower in the first half of 2009 compared with the first half of 2008 but increased by 19% in
the
second half compared to the first half of 2009, reflecting both the improvement in trading conditions and also the
normal
seasonality of the business.
Profit contribution for 2009 was some 41% lower than for 2008 (at constant exchange rates) with a small contribution in
the
first half but a more substantial contribution in the second half.
The transfer of European solder paste production from Ashford, UK to Hungary was completed at the end of the third
quarter
of 2009.
Chemistry
The Chemistry product line manufactures speciality electro-plating chemicals under the trade name Enthone. Approximately
45% of sales are to the electronics industry and 55% to industrial and automotive applications.
Revenue for the year of £222m was 18% lower than 2008 at constant exchange rates (7% lower at reported exchange rates).
Excluding precious metal sales and back-to-back electro-plating equipment sales, underlying revenue was 18% lower than
last
year (at constant exchange rates). Sales of plating-on-plastics and corrosion and wear-resistant coating products for
industrial and automotive markets were down 22%, whilst sales of surface coating products serving the PCB fabrication
market within electronics were down 21%, reflecting the difficult trading environment in these markets particularly in
the
earlier part of the year. Copper damascene sales into the semi-conductor market were well ahead of 2008.
Underlying revenue was 31% lower in the first half of 2009 compared with the first half of 2008, but increased by 20% in
the second half compared to the first half of 2009 reflecting both the improvement in electronic materials end-markets
and
also the normal seasonality of the business.
Profit contribution for 2009 was just under 23% lower than for 2008 (at constant exchange rates). A small profit
contribution was reported in the first half, whilst the more substantial contribution in the second half of 2009 was
higher
than either the first or second halves of 2008.
With the continued growth of China's electronic materials, automotive and industrial end-markets, the construction of
the
new £10m Chemistry facility in Shanghai, which had been delayed through 2009, was started in the first quarter of 2010
with
expected completion by late 2011. Currently the China market is served from Cookson facilities in Shenzen, Tianjin and
Singapore.
Precious Metals
The Precious Metals division is a leading supplier of fabricated precious metals (primarily gold, silver and platinum)
to
the jewellery industry in the US, UK, France and Spain, and also has significant precious metal recycling operations in
Europe.
Revenue (£m) Net Sales Value (£m) Trading Profit (£m) Return on Net Sales Value (%)
2009 2008 2009 2008 2009
2008 2009 2008
First half 147 155 63 55 2.3
1.9 3.7 3.5
Second half 153 163 70 63 6.6
2.6 9.4 4.1
Year 300 318 133 118 8.9
4.5 6.7 3.8
4.5
6.7
3.8
The Precious Metals division operates in two distinct geographic regions: the US, which constituted 47% of the total net
sales value (being revenue excluding the precious metals content) for the division, and Europe (which is focused on the
UK,
France and Spain). Average precious metal prices in 2009 have been approximately 10% higher than last year for gold but
lower for silver and platinum (6% and 27% lower respectively). The gold price was relatively stable during the first
three
quarters of 2009 but rose significantly during the fourth quarter such that it ended 2009 nearly one-quarter higher than
at
the beginning of the year.
Net sales value of £133m was unchanged compared to 2008 at constant exchange rates (13% higher at reported exchange
rates).
Weaker retail jewellery markets due to consumer spending cutbacks, were offset by strong sales to the US Mint of gold
coin
blanks and higher levels of precious metal reclaim in Europe, stimulated by the high price of gold.
Trading profit for 2009 at £8.9m was some 75% higher than 2008 at constant exchange rates (nearly double at reported
exchange rates) with improved profitability in both the US and Europe. The US benefitted from action taken in the first
quarter of 2009 to reduce permanent headcount at the US production facility by one-fifth, and the continued relocation
of
production to the Dominican Republic facility, which opened in 2008. There has been some re-manning of the US
production
facility in the fourth quarter as activity levels increased and, as a result, US headcount at the end of December 2009
was
around 15% lower than at September 2008. European profitability reflected the benefits of earlier restructuring and the
high level of reclaim business, particularly in Spain. Trading profit for the division as a whole was £2.3m in the
first
half of the year and £6.6m in the second half reflecting both the normal seasonality of the business and the impact of
the
restructuring of the US operations in the first quarter.
Group corporate
The Group's corporate costs, being the costs directly related to managing the Group holding company were £7.3m,
marginally
lower than for 2008.
FINANCIAL REVIEW
Group results highlights
Change
2009 2008 vs 2008
Profit/(loss) before tax (£m)
- headline 75.7 176.2 -57%
- basic (20.9) 89.6 -123%
Earnings/(loss) per share (pence)1
- headline 18.0 88.5 -80%
- basic (19.2) 32.7 -159%
Dividends per share (pence)1,2
- interim - 8.8 down 8.8p
- final - - -
Free cash flow (£m) 157.3 73.1 up £84.2
Net debt (£m) 371.4 731.7 down £360.3
- final
-
-
-
Free cash flow (£m)
157.3
73.1
up £84.2
Net debt (£m)
371.4
731.7
down £360.3
1 As restated for the effect of the share consolidation in May 2009
#2 Dividends are presented on an "as declared" basis
As described in detail in the Operating Review, all of the Group's businesses experienced very difficult end-market
conditions during 2009. However, trading results did improve as the year progressed due to some improvement in
end-markets
and the increased benefit of cost-savings. Trading profit in 2009 decreased by 54% to £111.7m at constant exchange
rates,
notwithstanding an additional quarter's contribution in 2009 from Foseco, which had been acquired in April 2008. The
positive impact of currency translation resulted in trading profit at reported exchange rates decreasing by 48% compared
to
2008.
After net finance costs (ordinary activities) of £37.0m, headline profit before tax was £75.7m. The Group's effective
tax
rate increased significantly in 2009 to 35.2% (2008: 27.5%) as a result of the impact of the difficult trading
conditions
on the geographic split of the Group's pre-tax profits.
The reduction in the Group's trading profit and the higher effective tax rate more than offset the lower finance costs
such
that headline profit after tax reduced by 57% to £75.7m. This, combined with a 80% increase in the weighted average
number
of shares as a result of the March 2009 rights issue, resulted in headline earnings per share decreasing by 80% to
18.0p.
As a result of the significant deterioration in end-market conditions, dividend payments have been suspended since the
end
of 2008 and the Board has decided to recommend to shareholders that there should be no final dividend in respect of
2009.
Net debt as at 31 December 2009 was £371m, a £360m reduction from 31 December 2008. This significant reduction arose as
a
result of strong cash generation during the year and the successful rights issue in March 2009 which raised net cash
proceeds of £241m.
Group Income Statement
Headline profit before tax
Headline profit before tax was £75.7m for 2009, which was £100.5m lower than for 2008. The decrease in headline profit
before tax arose as follows:
2009 2008 Change
£m £m £m %
Trading profit:
- at 2009 exchange rates 111.7 244.6 (132.9) -54%
- currency exchange rate impact - (28.3) 28.3
Trading profit - as reported 111.7 216.3 (104.6) -48%
Net finance costs - ordinary activities (37.0) (40.8) 3.8 +9%
Post-tax income from joint ventures 1.0 0.7 0.3 +43%
Headline profit before tax 75.7 176.2 (100.5) -57%
+43%
Headline profit before tax
75.7
176.2
(100.5)
-57%
The £3.8m lower charge for net finance costs (interest) principally arose due to a reduction of just over 2 percentage
points in the average interest rate payable on gross borrowings. Pension interest in 2009 of £4.8m, included within net
finance costs, increased by £1.1m primarily due to the full year impact of the acquisition of Foseco.
Items excluded from headline profit before tax
A net charge of £96.6m was incurred in 2009 (2008: £86.6m) for the following items excluded from headline profit before
tax:
Restructuring and integration costs: of the total charge of £75.6m (2008: £39.6m), £53.6m related to items, principally
redundancies, where there is a fairly immediate cash cost, and £22.0m to provisions for onerous lease obligations where
the
cash outflow will be spread over the remaining years of the related leases. The principal items included in the charge
for
2009 were as follows:
· £44.3m arose in the Ceramics division, of which £4.9m related to the integration of Foseco and £39.4m to the
cost-saving initiatives. Of these costs, £30.3m related to redundancy costs, £3.8m to provisions for discounted future
onerous lease rental costs and £10.2m to other cash-related costs;
· £27.8m in the Electronics division, of which the principal element was a £18.2m provision for discounted future
onerous lease rental costs. The restructuring of the Electronics division's UK operations has resulted in the transfer
of
a significant amount of UK production to other existing Electronics facilities outside of the UK, resulting in
significant
unutilised space in the UK. This facility is subject to a lease under which the future rentals which relate to the now
unutilised part of this facility represent an onerous obligation. The remaining restructuring costs in the Electronics
division comprise £5.3m of redundancy costs and £4.3m of other cash-related costs associated with the rationalisation of
the division's European and US operations; and
· £2.4m in the Precious Metals division, of which £1.5m related to redundancy costs associated with the restructuring
of
the division's US operations.
Additional restructuring charges (cash-related) of between £5m to £10m are expected to be incurred in 2010.
(Loss)/profit relating to non-current assets: the net loss of £2.8m (2008: profit of £3.4m) comprised net losses of
£0.3m
(2008: profit of £8.4m) arising on the sale of investments and surplus property, and asset write-downs of £2.5m (2008:
£5.0m).
Amortisation and impairment of intangible assets: costs of £17.6m (2008: £12.9m) were incurred in 2009 relating to the
amortisation of intangible assets, principally customer relationships, intellectual property rights and the Foseco trade
name, arising on the acquisition of Foseco in April 2008. These intangible assets are being amortised over lives
varying
between 10 and 20 years. 2008 also included a charge of £39.6m related to the write-off, as a non-cash charge, of all
of
the goodwill relating to the Precious Metals division.
Exceptional gains relating to employee benefits: a credit of £9.7m (2008: £6.0m) was realised in the year relating to
the
termination of certain of the Group's post-retirement healthcare benefit arrangements in the US which was announced in
December 2009. In 2008, a credit was realised relating to the full closure to future accruals of Foseco's US defined
benefit pension plans, the disposal of Foseco's Carbon Bonded Ceramics business and the impact of redundancy programmes
in
the UK and the US.
Finance costs - exceptional items: costs of £14.0m (2008: £2.2m) were incurred in 2009 principally relating to the
close-out of interest rate swaps. In March 2009, following receipt of the £241m of rights issue proceeds, the Group
prepaid £75m and E37.5m of term debt, with an original maturity of October 2010, under its syndicated bank facility. In
April 2009, the Group's borrowing profile was amended such that all of the foreign currency-denominated borrowings drawn
under the syndicated bank facility were converted into sterling. Following these transactions, the Group closed out a
number of interest rate swaps that had originally been taken out to hedge the interest payments relating to these
borrowings. As a result of the reduction in global interest rates over the previous eighteen months, the swaps had
accumulated a negative fair value of £12.8m. Under hedge accounting rules, this fair value, which prior to the
close-outs
had been reported in reserves, was transferred to the income statement as an exceptional item along with £1.2m of other
associated costs. On the assumption that interest rates remain at current levels, the closing out of these interest
rate
swaps will continue to have a beneficial impact on the Group's finance costs going forward.
Net profit on disposal of continuing operations: a net profit of £3.7m (2008: £0.9m) was realised in 2009 principally
relating to the disposal of the Ceramics division's Pyrobor operations, a small non-core business manufacturing high
temperature insulation boards acquired with Foseco.
Group loss before tax and after the items noted above was £20.9m for 2009 compared to a profit before tax of £89.6m in
2008.
Taxation
The tax charge on ordinary activities was £26.3m on a headline profit before tax of £75.7m. The effective tax rate on
headline profit before tax (before share of post-tax profit of joint ventures) was 35.2%. For 2009, the Group reported
profit before tax in a number of tax-paying jurisdictions (such as China and India), whilst incurring losses before tax
in
jurisdictions (notably the US) where it is not appropriate to record a tax credit. The Group's effective tax rate for
2010
is expected to be around 30%, marginally higher than the 27.5% rate reported in 2008, although it will be strongly
influenced by the actual geographic split of profit before tax.
A tax credit of £5.9m (2008: £8.1m) arose in relation to all the items excluded from headline profit before tax noted
above. A significant amount of these exceptional items arose in jurisdictions (notably the UK and the US) where it is
not
appropriate to record a tax credit.
Discontinued operations
A charge of £3.4m (2008: £nil) was incurred in 2009 in respect of additional costs for operations discontinued in prior
years.
(Loss)/profit for the year
Headline profit attributable to owners of the parent for 2009 was £45.6m (2008: £124.6m), with the £79.0m decrease over
2008 principally arising from the significant decrease in headline profit before tax and the higher effective tax rate.
Profit attributable to non-controlling interests of £3.8m was marginally higher than for 2008.
After taking account of all items excluded from headline profit before tax noted above (net of the related tax impact)
and
the charge relating to discontinued operations, the Group recorded a loss of £44.7m for 2009, £94.1m lower than the
£49.4m
profit recorded in 2008.
Return on investment (ROI)
The Group's post-tax ROI in 2009 was 3.4%, below the 8.2% reported in 2008 reflecting the very difficult end-market
conditions during the year. The Group's post-tax cost of capital ("WACC") is approximately 9%.
Earnings per share (EPS)
The average number of shares in issue during 2009 was 252.8m, 112.0m higher than for 2008 principally reflecting the
issue
of 255.1m new shares in respect of the rights issue in March 2009. In accordance with IAS 33, the average number of
shares
in issue used in the calculation of EPS for all periods prior to the rights issue has been multiplied by an adjustment
factor to reflect the bonus element in the new shares issued. The adjustment factor used was 6.6391. The average
number
of shares also reflects the share consolidation in May 2009 whereby shareholders exchanged 10 existing shares for 1 new
share.
Headline earnings per share, based on the headline profit attributable to owners of the parent divided by the average
number of shares in issue, amounted to 18.0p per share in 2009, compared to headline earnings
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