Tomkins Announces Interim Fiscal Results
11 January 1999
Tomkins Announces Interim Results for the Six Months Ended October 31, 1998
Business Editors
NOTE TO EDITORS: In the company name Wal*Mart in this
news release, there is an "asterisk" symbol,
between Wal and Mart. This symbol may not appear
properly in some systems.
LONDON--Jan. 11, 1999--Tomkins PLC ,
the international manufacturing company, today announced the interim
results for 26 weeks ended October 31, 1998.
HIGHLIGHTS
-- 14.3% dividend increase
-- Underlying fully diluted earnings per share rise 6.4%
-- Pre-tax profit advances to (pound)220.1 million ($355.5 million(a))
-- Sales (pound)145.1 million ($234.3 million) above level of
previous year
-- Two more businesses sold, further corporate activity planned
-- Number of add-on acquisition opportunities increasing
-- Net debt averages (pound)125 million over period
(a) US dollar equivalents are provided for reader convenience at the
hedged exchange rate of (pound)1.00 = $1.6150
Gregory Hutchings, Executive Chairman of Tomkins, said:
"Tomkins has delivered another sound performance and I am pleased
that shareholders will again receive an interim dividend increase
close to 15 per cent.
Our businesses, particularly those in the Construction Components
and Food Manufacturing sectors, should deliver further growth as they
capitalize on the strengths of their market positions and benefit from
their low cost bases. Conditions in some of our industrial markets are
becoming more difficult as demand is affected by lower rates of global
economic activity.
Our experienced and proven management teams are well placed to
address these challenges which should also generate further add-on
acquisition opportunities as price expectations come down to more
realistic levels.
I am confident that Tomkins' inherent strengths should ensure we
deliver, in the light of current economic circumstances, a
satisfactory result and extend our record of outperformance."
CHAIRMAN'S STATEMENT
I am pleased to report that Tomkins has delivered a solid trading
performance in the twenty-six weeks ended October 31, 1998 in an
increasingly difficult economic environment. Fully diluted earnings
per share, before exceptional item, increased 6.4 per cent to 10.55
pence (17.04(cent)) while profit before tax and exceptional item rose
2.4 per cent to (pound)220.1 million ($355.5 million). Sales grew 5.9
per cent and were over (pound)145 million ($234 million) ahead of the
corresponding period last year.
The interim dividend is raised 14.3 per cent to 4.00 pence (net)
(6.46(cent)) per share and comprises two components: a fixed payment
of 3.06 pence (net) in the form of a Foreign Income Dividend and an
additional ordinary dividend of 0.94 pence (net). Shareholders will be
given the choice of receiving payment in cash or increasing their
holding in Tomkins shares through the Dividend Reinvestment Plan.
Operations
Trading during the period under review became progressively more
challenging. While generating sales growth remains a priority, our
management is careful to ensure that this objective is achieved
without adversely impacting the profit margin. Many of our markets are
experiencing low inflation, or even deflationary conditions, which
allow only limited opportunities for price increases. Our goal is to
continuously improve both sales and margin through a combination of
innovation and new product introductions; international expansion
where appropriate; enhanced productivity through capital investment
and constant attention to the cost base.
Around half Tomkins sales are generated in the US, the world's
largest economy. Our construction components businesses, which are
predominantly North American based, continue to experience a stable
environment in their growing markets. Steady economic conditions and
falling interest rates have helped drive demand. Sales of products for
new and manufactured housing and remodeling are running ahead of the
level of twelve months earlier.
Gates is making steady progress integrating Schrader-Bridgeport,
the add-on acquisition completed close to the end of the last
financial year. The combination of Gates, Stant and Schrader, our
industrial and automotive engineering companies, has already realized
considerable cost saving synergies as well as highlighting exciting
incremental sales growth opportunities, both in the US and
internationally. Demand for automotive products has been satisfactory,
both from the original equipment manufacturers and the aftermarket.
The industrial sector is weakening and a number of major customers,
particularly those serving the agricultural, construction equipment
and paper and packaging markets, have imposed production cutbacks,
which are having an adverse effect on Gates. The repercussions of the
slow-down in Asia Pacific and Latin America (which account for
approximately four per cent of total Tomkins sales) continue to be
felt and resulted in lower demand.
The performance of the UK food manufacturing companies was
commendable. The result reflects the success of our strategy of
expanding in growth sectors, including developing partnerships with
key customers. The broadening of our interests in frozen bakery
products, both in the UK and mainland Europe, is already delivering
promising results. The price of wheat, our most important food raw
material, was lower than in the comparable period last year. While our
companies were helped by this input cost saving, much of the resulting
benefit was passed on to customers, which meant that it had a
corresponding negative effect on sales value.
Strategy
Over the past two years Tomkins has progressed significantly
through implementing its evolving strategy. We have sold 22 companies
and spent close to (pound)750 million ($1.2 billion) on add-on
acquisitions, all financed from internal cash resources and debt. The
Company is now focused on a small number of strategic business
activities which manufacture products for the engineering, food and
building markets. Each of these key areas is characterized by common
customers, markets, products or technologies. This important change in
our structure has been recognized in the UK by the FTSE Actuaries
Committee, which reclassified Tomkins to the Engineering, General
sub-sector from Diversified Industrials with effect from December 21,
1998.
Considerable progress has also been made towards creating a more
effective capital structure; net debt averaged (pound)125 million over
the period, equivalent to gearing of approximately 12 per cent. Our
preference is to maintain an effective capital structure with a
gearing target base of around 15 per cent. This will allow us
unfettered opportunity to spend on capital investment and also take
advantage of add-on acquisitions, particularly if the target prices
become lower over the next year or so. We are seeking purchases which
fit logically within our three core business activities and are priced
to deliver a return on investment in excess of our weighted average
cost of capital within three years. Recent global market volatility
has brought some positive movement in vendor price expectations, which
could provide attractive opportunities.
Outlook
General economic conditions have become progressively more
difficult and, along with many other major international companies, we
remain cautious about the short-term outlook. It is pleasing to report
that Construction Components in the US continues to trade
satisfactorily and in the UK our Food Manufacturing companies are
holding up well. The Industrial & Automotive sector is being adversely
affected by a reduction in demand from major US industrial customers.
Tomkins growth in the current year looks unlikely to be at the same
definitive levels as in previous years. Nevertheless, we anticipate
that even with the increasingly more difficult industrial climate our
focus on growth opportunities, coupled with Tomkins inherent financial
strengths, will ensure that we will continue our outperformance in
earnings compared with the general industrial average.
Gregory Hutchings
Executive Chairman
OPERATING REVIEW
Industrial & Automotive Engineering
1998/99 1997/98
Sales (pound)838.0m (pound)761.1m
Operating profit (pound)77.8m (pound)71.5m
Operating net assets (pound)595.9m (pound)405.6m
Average number of employees 24,844 22,353
Demand in North America, which accounts for over sixty per cent
of sector sales, remained generally sound. Sales of Gates' automotive
power transmission and hose and connector products were over four per
cent ahead of the equivalent period last year, reflecting increased
demand from both the original equipment manufacturers and the
aftermarket. Strategic investment to reorganize automotive hose
manufacturing was completed and this will enhance efficiency.
Industrial sales were close to last year's level but began to fall
away towards the period end with many customers announcing production
cut backs.
In Europe, demand for power transmission products remained good,
while hose and connector sales were affected by lower margins in a
very competitive environment. Further restructuring of this business
is taking place. Gates reinforced its long-established involvement in
the Far East through the creation of Gates Nitta Asia Pacific Company
(GNAPCO), which is now responsible for all its power transmission
operations in the area. The outlook for long-term recovery in the
region is positive and development opportunities are being actively
pursued.
The integration of Schrader-Bridgeport commenced and significant
cost saving synergies have been identified. Tomkins reporting and
financial systems have been installed in most locations. The Schrader
aftermarket sales operations are being combined, where appropriate,
with those of Gates and Stant, in the US and internationally, in order
to generate incremental business while benefiting from economies of
scale.
Food Manufacturing
1998/99 1997/98
Sales (pound)962.9m (pound)853.0m
Operating profit (pound)71.4m (pound)62.3m
Operating net assets (pound)495.7m (pound)471.1m
Average number of employees 22,487 22,426
The trading performance during the period was delivered against a
background of variable demand from the major UK retailers. The result
reflects the success of our strategy of placing a greater emphasis on
the faster growing areas of the food market. Trading in our
partnership businesses supplying McDonald's, Marks & Spencer and Pizza
Hut has been strong. This area now accounts for some seventeen per
cent of sector sales, more than double the level of two years ago. Le
Pain Croustillant in the UK and Martine Specialites in South West
France, our recent acquisitions supplying the European frozen bakery
market, made an excellent initial contribution. The bread price rise
introduced in June 1998 helped recover some costs, although part of
this benefit has been eroded through increasing price competition on
value bread.
Demand for cake has been stable with good new product
introductions under each of our well-known brands, Mr. Kipling,
Cadbury's and Lyons. Among the grocery operations, Sharwood's recorded
strong sales growth following the launch of its Kerala range of
sauces. This innovative product was supported by a major advertising
campaign which has helped to secure a significant increase in market
share for the company's ethnic sauces.
Construction Components
1998/99 1997/98
Sales (pound)561.0m (pound)625.7m
Operating profit (pound)64.9m (pound)61.8m
Operating net assets (pound)232.7m (pound)245.7m
Average number of employees 15,470 16,992
In North America, where over eighty per cent of sector sales are
generated, our operations continue to experience generally stable
conditions in their various building related areas. The commercial
construction market is experiencing its seventh consecutive year of
growth which particularly benefits our air handling product
manufacturers. Air System Components will shortly commence production
in its new North Carolina facility while Ruskin has already started
operating its new West Virginia plant. This new capacity is essential
to enable the businesses to meet customer requirements for shorter
lead times.
Our operations supplying the new, site build, remodeling and
manufactured housing markets maintained growth by increasing share in
relation to growing demand. Lasco Bathware raised sales close to 8 per
cent helped by gains in the higher margin whirlpool segment. The
company is close to being capacity constrained and site selection is
proceeding for a ninth plant to meet the fast growing demand for its
high quality products.
The UK specialist valve producers continue to experience very
tough trading influenced by patchy conditions in the housing market
and the strength of sterling, which increased competition from
imports. Pegler did well to maintain volumes assisted by a number of
successful new product launches of niche, higher margin items.
Professional, Garden & Leisure Products
1998/99 1997/98
Sales (pound)240.7m (pound)217.7m
Operating profit (pound)6.2m (pound)8.1m
Operating net assets (pound)131.4m (pound)160.4m
Average number of employees 4,278 4,362
Murray delivered an improved performance with mower sales ahead
of the equivalent period last year. This reflected the positive impact
of a longer spring selling season and included incremental sales
growth as mass merchant customers expanded their distribution networks
through further new store openings. The period also saw the
introduction of innovative new products including a walk-behind
strimmer developed for Sears and an adult "Go-kart" for Wal*Mart.
Bicycle sales continued to be affected by industry over-capacity and
very aggressive pricing, which resulted in further downward pressure
on margins. Murray management is maintaining its focus on financial
control and productivity improvement; further progress was made during
the period to lower the cost base.
Smith & Wesson has had a particularly difficult first half with a
significant decline in sales and profitability. The company could not
execute a number of orders owing to the continuing delay in the grant
of US export licenses. In the US, consumers became concerned that
changes in legislation regarding rifles and shotguns would make these
products less readily available and consequently purchased them in
preference to handguns. This has led to unusually slow sales for Smith
& Wesson and the company has responded by devising and introducing a
number of promotional schemes.
FINANCIAL REVIEW
Strong cash generation has again been a feature of the half year.
Free cash flow per share was 20.38 pence, which is a 15.1 per cent
improvement over the prior year first half and is over 1.8 times basic
earnings per share, before exceptional item, of 11.15 pence. The cash
generation confidently supports the interim dividend increase of 14.3
per cent to 4.0 pence (net) per share.
Free cash flow is calculated as:
Profit attributable to shareholders (pound)108.4 million
+ Minority interest 1.3
+ Tax charged 70.4
- Tax paid (net) (48.8)
+ Depreciation (net) 86.4
+ Provision for
disposal of business 40.0
- Share of profits of
associates in excess
of dividends received (0.7)
- Preference dividends paid (17.3)
=======================
Net free cash generation (pound)239.7 million
=======================
-- with the per share calculation based on 1,176,292,664 weighted
average ordinary shares in issue for the half year.
Free cash generated was applied as to:
Capital expenditure (net) (pound)136.6 million
Dividend paid on
ordinary shares 114.1
Buy-back of own shares 11.1
Add-on acquisitions 7.2
-- augmented by a desirable increase in the level of net debt to
(pound)48.6 million at the balance sheet date.
Dividend
The interim dividend of 4.0 pence (net) (6.46(cent)) per share
will be paid on March 31 to shareholders recorded on the register at
the close of business on February 5. The shares will trade ex-dividend
from February 1.
The Dividend Reinvestment Plan (the "DRIP") will again be offered
to shareholders as it is proving to be a popular method, particularly
for small shareholders, to increase their holdings in Tomkins. For the
dividend paid in October 1998 over 4,700 shareholders elected for the
DRIP in respect of 36.3 million shares and, through their generosity
with the rounding amounts, donated almost (pound)5,000 to United
Response, our chosen charity.
Financial Reporting Standards
Effective May 3, 1998 Tomkins adopted the new standards:
FRS 10 Goodwill and intangible assets
FRS 11 Impairment of fixed assets and goodwill
FRS 12 Provisions and contingencies
FRS 14 Earnings per share
-- having previously adopted early the requirements that became FRS
13 - Derivatives and other financial instruments: disclosures.
This ensures that our conservative accounting and disclosure
policies fully conform to the latest best practice.
Disposal of Flour Mills
On September 24, 1998, the Secretary of State for Trade and
Industry, supporting the recommendations of the report of the
Monopolies and Mergers Commission, required Tomkins to dispose of four
of the six Spillers flour mills purchased in March 1998.
We remain very disappointed with the ruling, believing we made a
compelling case that the acquisition was in the interests of
competition in the industry. However, we are complying with the
disposal requirement and are involved in negotiations with several
interested parties. The outcome of these negotiations remains
uncertain but, at this time, the directors' best estimate of the
outcome is that a loss on disposal of (pound)40 million will arise.
This has been taken as an exceptional charge in the half year.
The Euro
In the short period since the introduction of the Euro on January
1, it is pleasing to report that all our systems and money market
actions have handled the new currency without problem.
Ian A. Duncan
Deputy Chairman and
Managing Director - Finance
Tomkins comprises a broad range of low-risk technology
manufacturing companies. Tomkins' US interests include The Gates
Rubber Company, Denver, CO, the world's leading manufacturer of power
transmission belts and a major producer of hose and connector
products. Other interests include, Murray, Inc., Brentwood, TN, one of
the leading US producers of power lawnmowers, snow blowers and
bicycles; Red Wing Corporation, Fredonia, NY, the largest US
manufacturer of private label grocery products; Smith & Wesson
Corporation, Springfield, MA, manufacturer of handguns, handcuffs and
the Identi-Kit system; and Tomkins Industries, Dayton, OH, a leading
manufacturer of components for residential, commercial, and industrial
buildings, materials handling and the transportation industry.
Tomkins shares trade in the US in ADR form (each equal to four
ordinary shares) on the New York Stock Exchange under the symbol TKS;
its ordinary shares are listed on the London Stock Exchange.
For tabular results, please contact Taylor Rafferty Associates at
212/889-4350