Financial engineering: Keith Cochrane, FD, Weir

Photography: Alex Griffiths

“Rock solid.” Two words every FD and chief executive would pay good money to hear said of their business ­ and the two words one analyst used to describe Glaswegian FTSE-250 engineering group Weir following its interim statement mid-May. “A high quality, exceptionally well-managed business, with a healthy balance sheet,” says another. “Not the cheapest engineering stock but one of the safest ­ long-term profile is very attractive.”

In March, Weir reported 2008 pre-tax profits of £176.2m, up 53% year-on-year, and delivered a 12% rise in annual dividends per share. It was, in chief executive Mark Selway’s words, “the best operating year in Weir’s history.” It seems the gods look favourably on the 139-year-old maker of industrial pumps and valves for the international oil and gas, mineral mining and power generation industries.

In the past two years, much was made by commentators of a £300m ‘war chest’ Weir CEO Selway had been happy to talk to the press about, which has been used (alongside the proceeds from some disposals) to make some very clever acquisitions.

With what, in retrospect, seems impeccable timing, finance director Keith Cochrane has been fundamental in setting out keenly conservative finances, spending most of his tenure since summer 2006 orchestrating deals that reduced its exposure to volatility in its pension liabilities and the potential for instability arising from the banking crisis. He spent most of 2007 working on a partial buyout of the group’s pension schemes, moving £250m of £600m in pension liabilities to Legal & General. He centralised Weir’s treasury operations to keep a closer grip on costs and, more crucially as it turned out, risk.

“I quite like all that sort of stuff handled in the centre, because with the best will in the world, there’s some great finance directors in our operating companies ­ but it’s a specialist area and it’s getting ever more specialist,” he says. In the months after Northern Rock, rather than waiting until their expiry in July this year, Cochrane wasted no time renegotiating the group’s financing agreements with its roster of banks, saving money by keeping the syndication work in-house. The improved terms, which extended credit lines to 2011, put him in a position to bring calming news to investors when markets were in a mess.

All in the timing
“We got lucky with our timing to a degree and that meant that when the financial world came crashing down in September 2008, we didn’t have any immediate worries from a financing perspective,” says Cochrane. “Events in the past six months certainly forced me to focus on things I never thought I would need to focus on. Investors have been asking questions they’ve not had to worry about before, such as funding ­ are your funding lines committed, which banks are involved, how much liquidity have you got, have you got access to your funds? ­ and we’ve been able to demonstrate that we’re in a good position.”

Whereas many FDs have been biting their fingernails to the quick this year ­ and last ­ Cochrane’s has been more of a caretaker role for a business that can’t seem to do much wrong. Its May interims confirmed the earlier forecast for full-year pre-tax profit to come in between £140m to £169m, with most analysts choosing the mid-to-upper reaches as their own prediction. The only news is that orders across its business declined 4% in Q1, though they were still up 33% in its oil and gas business and up 6% in its power and industrial business. It must help that Weir gives realistic-sounding guidance on where it thinks business will dip in the next 12 months, rather than aiming for improvement in every area.

It warns that capex deferrals in all its markets, inventory reduction in the minerals business, and reduced appetite for new equipment will impact H2 2009 and has built into its full-year forecasts the expectation of a 30% drop in revenue in its upstream oil and gas business, its fastest-growing division in 2008 ­ but even then, this merely represents a downgrade from ‘excellent’ to ‘re ally good’.

Consequently, Cochrane is enjoying himself, not unduly concerned with a lack of meaty challenges. Given his background, that’s understandable. He is most noted in the business community for having been CEO of Stagecoach in 2000 ­ to which he was promoted after being FD for four years ­ presiding over a torrid two years of losses and the woes of its American business, Coach USA. Cochrane spent half his time in Houston on cost-cutting and reorganising there, while the parent group struggled back at home.

Then the terrorist attacks in 2001 saw Coach’s business fall off a cliff. The following June he was quoted in Forbes magazine calling Coach customers ‘riff raff’ (Stagecoach denies he ever said this). The following month he resigned, eight years after Brian Souter poached him from Arthur Andersen (where Cochrane had just finished working on the Stagecoach flotation) as his FC, and later FD. He didn’t manage to save the share price or plug the financial losses from either group or Coach in his time.

No regrets
“Some of the things we did in terms of restructuring and getting our arms around the US, even in that two-year period, I’m still very proud of. But I recognised it was probably the right time for Brian to take over at Coach rather than us both trying to do the job and I respected Brian’s position ­ he had views on how he wanted to move things forward,” admits Cochrane. “I’d say I’m a better FD as a consequence, mostly in terms of commercial understanding and broader management issues. I certainly don’t regret doing it.”

What about working for Souter, one of British business’s more colourful characters? “I had a great relationship with Brian. It was probably the natural next step in Stagecoach to become CEO and if I was going to try it, where better than an organisation and management team I’d been with for years, and a chairman for whom I had immense respect?”

After an 11-month break from business following his Stagecoach departure, Cochrane joined ScottishPower as director of group financial reporting under FD David Nish. But that was not without its troubles. Moving to become director of group finance in spring 2005 amid a management restructure, which then saw Nish named head of infrastructure and executive director Simon Lowth, an ex-McKinsey consultant (now CFO at AstraZeneca) made finance director, there were suggestions he was passed over for the FD role. He admits he wanted the job, but was deeply involved in finance in that role as the group pushed through the sale of its PacifiCorp business.

“I’d be daft if I said I didn’t want it; it would have been agreeable,” he concedes. “But I was given responsibility working for Simon for all sort of core finance functions, treasury, tax, internal external reporting. It was a very broad role and it gave me exposure to a lot of interesting activities across the organisation. At that stage, the organisation was going through the PacifiCorp sale, so there was a lot happening, a lot of interesting stuff to learn from. But I recognised from a career point of view it probably wasn’t a long-term solution.” A year later Cochrane got the FD spot ­ but at Weir Group.

A round of acquisitions would seem the sensible way for an FD with a tidy balance sheet to keep busy, especially when there are scores of smaller, privately-held businesses in Weir’s markets that could be complementary and, now, unusually well priced. Cochrane says the aim is to grow Weir’s upstream oil and gas division to supply every part of the machinery between the well head and the pump, focusing on North America, and to expand its downstream presence in the Middle East through its Italian subsidiary, Gabionetta. A nice addition, he says, would be extending its reach in minerals, what he calls low circuit ­ all the parts needed to create the production line of machinery that converts rock into tradeable commodities. But he’s in no rush.

Considered approach
“Where we see good opportunities to support organic growth of the group are in short payback projects driven off efficiency savings. But our ‘war chest’ isn’t burning a hole in either my pocket nor Mark’s,” he says. “We’re very considered and deliberate about our acquisition strategy. I’ll be honest and say it’s very difficult to put valuations on businesses right now; sellers are still working out the true value of their business, sitting on their hands and sometimes it takes a trigger for them to become a forced seller. I’m not sure we’re at that point in the cycle as yet, so we’re not rushing out to spend.”

Weir could do well from the resurgence of nuclear power and of power plant upgrades across the UK, the US and even China. On the day Financial Director met Cochrane, the Financial Times ran a story on the frenzied bidding from German and French utility groups for British land on which to build nuclear plants.

“When British Energy extends the life of plants by another five to 10 years, we will get some work from that and should be organic growth and revenue opportunities through the development of new nuclear plants and the life extension of some of the older plants, such as those in the UK. But while there’s been a lot of talk about nuclear, it seems to take a long time for anything to happen,” says Cochrane. “I don’t understand enough about the US stimulus package to know if there are going to be fiscal support incentives, but I think there is a recognition that some of these plants are getting quite old and a replacement cycle will need to start soon. We’re waiting to see the extent to which the Chinese stimulus package is targeted towards building or accelerating their build programme of nuclear plants ­ that potentially could be a good thing for us.”

Clearly, the breadth of Cochrane’s professional experiences culminate in cri tical mass that benefits Weir in many ways. It’s tempting to ask if he would ever revisit being a CEO. “No. I enjoy the FD role, particularly in an organisation like Weir where it gives you breadth of coverage. I think the financial side is fascinating and in the modern world where you partner with your chief executive, frankly, you can get almost as much exposure being an FD as you can being a CEO ­ it’s a badge that gives you the ability to dip into most things across an organisation,” he says. “It’s a unique role in the organisation, because you see the breadth of activity across the group, you participate and support the CEO in strategic discussions and the direction of the business and you have insight into a lot of the commercial activities that take place across the operation.
“Weir has all those opportunities in spades which makes for a pretty interesting role. I’m pretty comfortable.”