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