Financial engineering: Keith Cochrane, FD, Weir

“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.”