Tomkins' Preliminary Announcement for the Year Ended May 1, 1999
12 July 1999
Preliminary Announcement for the Year Ended May 1, 1999
LONDON--July 12, 1999--Tomkins PLC , the international manufacturing company, today announced its preliminary results for the year ended May 1, 1999.RESULTS HIGHLIGHTS
| -- | 8% rise in pre exceptional diluted earnings per share |
| -- | Full year dividend increased by 15% |
| -- | Pre tax profit, before exceptionals, of (pound)496.5 million ($799.1 million/a) |
| -- | (pound)546 million ($878.8 million) net borrowings at year end, gearing of 90.5% |
| -- | Capital expenditure reaches record (pound)275.7 million ($443.7 million), 57% above depreciation |
| -- | (pound)658 million ($1,059.1 million) returned to shareholders via share buy back since September 1997 |
| -- | ROI at 10.6% exceeds WACC of 8.2% |
STRATEGIC DEVELOPMENTS
-- Focus on automotive, construction and industrial markets
-- developing global presence
-- technical strength in systems, sub systems and modules
-- close customer relationships with OEMs and in aftermarket
-- Demerger of European food businesses planned for early 2000
Commenting on Tomkins' strategy, Gregory Hutchings, Chairman, said: "This is the appropriate stage in Tomkins' development to accelerate its evolution. The changes, which we have announced today, will enable us to take full advantage of the exciting opportunities we see for growth and development of our core businesses for the benefit of our shareholders."
CHAIRMAN'S STATEMENT
This has been another positive year for Tomkins, characterized by strategic and commercial change, as we strive to deliver shareholder value. We have addressed a number of structural issues and identified a clear path for the future, which positions the company for growth.
In the year to May 1, 1999, pre exceptional diluted earnings per share rose over eight percent to 24.57 pence.
This solid performance, combined with continued strong cash generation, enables us to maintain our progressive dividend policy. The Board proposes to raise the final dividend by 15.3% to 11.15 pence (net) per ordinary share, which makes a total for the year of 15.15 pence (net) per share, an increase of over fifteen percent over the previous twelve months.
We achieved a sales increase of almost six percent to (pound)5,345 million in markets characterized by rates of inflation close to zero.
Our pre exceptional profit before tax figure of (pound)496.5 million was marginally under last year's result, primarily due to utilizing our cash resources to buy back our own shares, which raised the efficiency of our balance sheet while incurring additional interest costs charged against profit.
These results have been achieved against a background of challenging trading conditions in our major markets. I have been encouraged, but not surprised, by the professional and committed manner in which our management teams have responded.
Strategy
During the last few years we have made good progress in the development of our Industrial & Automotive division and have now taken the opportunity to review the future strategy and shape of the group.
Following the acquisition of The Gates Corporation in July 1996, Tomkins bought Stant in May 1997, Schrader-Bridgeport in April 1998 and most recently ACD Tridon in June 1999. This combination of businesses provides Tomkins with a strong platform from which to build a global Industrial & Automotive components business. The Board has determined that the opportunities presented by industrial consolidation, the shift in design and engineering responsibility to the component manufacturer and the requirement for a global presence in product areas, require a tighter focus from the group. Tomkins intends to concentrate its energies and resources on its automotive, construction and industrial activities.
The Board has set in train the process for a demerger of Tomkins European food manufacturing activities, which would take place, subject to the resolution of technical issues and regulatory and shareholder approvals, in the early part of the year 2000.
The strategy is designed to permit the engineering and food business to focus their separate financial, management and other resources on their respective businesses.
The European food businesses are now of a scale and stage in their development where they can have an exciting future outside Tomkins as an independent publicly listed group. Tomkins has created a formidable Food Manufacturing division which generated operating profit of (pound)165.4 million in the year to May 1, 1999, on sales of (pound)1,965.1 million. The European food businesses have a strong portfolio of well known brands in the UK including Hovis, Sharwood's Bisto, Mr. Kipling, McDougalls and Robertson's. The Food Manufacturing businesses have exploited the growth opportunities presented by the changes in consumer lifestyle through investment in resources, processes, technology, new product development and marketing.
The European food businesses have a strong management team led by Paul Wilkinson who has headed the successful development of the business for the last three years. This team will be strengthened by the appointment of Ian Duncan as Chairman. In order to avoid a conflict of interest during the separation of the food manufacturing operations, Ian has left the Board of Tomkins, with effect from today, but will continue at Tomkins during the demerger process. Ian has made a huge contribution to the development of Tomkins since he first joined as Financial Director. A demerger of the food interests presents an excellent opportunity for him to utilize his leadership skills to the full.
Having regard to the cash generation and investment requirements of the food manufacturing activities, the Board would expect that the major part of the group's debt would be included within these businesses, thus strengthening financial capacity for the development of Tomkins' non-food activities.
Tomkins has received approaches in the past for parts or all of its food manufacturing activities. It will place itself in a position to respond appropriately if such approaches are received going forward, and to test them in the light of the Board's wish to maximize shareholder value.
Tomkins will in any event be selling Red Wing, its U.S. food business which is managed separately from the European food manufacturing activities. It will also continue to progress the disposal of the Murray and Hayter businesses, which make up the majority of Tomkins' Professional, Garden & Leisure Products division.
In addition to the Industrial & Automotive division, Tomkins will also develop its presence in Construction Components which are high return niche businesses, operating predominantly in the U.S.
This evolved structure will allow Tomkins to build leading national and international component businesses capable of achieving above average growth in automotive, construction and industrial markets based on Tomkins' existing market positions and its core competencies in:
| -- | the design and manufacture of components, modules, sub-systems and systems for global OEM customers |
| -- | the manufacture and distribution of components and product packages for leading aftermarket distributors |
| -- | the ability and strength to capitalize on industry consolidation through organic growth and acquisitions |
| -- | the know-how to pursue a lean enterprise philosophy geared to continuous productivity improvements through customer driven investment and development |
In the year to May 1, 1999, the Industrial & Automotive Engineering and Construction Components divisions generated operating profit of (pound)307.0 million on turnover of (pound)2,803.6 million.
In order to expand its core businesses, Tomkins intends to pursue growth opportunities through capital investment and targeted acquisitions.
Trading
Conditions in North America continue to be generally sound. Our Industrial & Automotive companies supplying power transmission belts, hose and connectors and a range of specialty products and systems encountered mixed conditions. The U.S. automotive market remained generally buoyant and our companies generated increased sales to the original equipment manufacturers and aftermarket customers. Sales to industrial users were below last year's level as a result of continuing softness in agricultural and construction equipment, which negatively influenced demand. Lower U.S. agricultural prices affected the farm machinery industry, while sales to construction equipment, particularly into key Asian markets, were affected by reduced local demand compounded by the relative strength of the U.S. dollar, thus damaging competitiveness. The integration of Schrader into the Gates and Stant organization made good progress and this, coupled with the ongoing drive to raise manufacturing efficiency, resulted in further plant consolidation and a number of facilities were closed. The one time costs associated with these changes impacted our profitability but they are expected to deliver higher productivity in future years.
In our Construction Components sector, the stability of the U.S. remodeling, residential and manufactured housing markets underpinned demand for our baths, doors, fittings, panels and windows. In addition, the inherent strength of the construction industry, both federal and commercial, created further attractive growth opportunities for our air distribution companies. Many elements of these markets continued to offer an environment for growth. The high level of demand resulted in some of our businesses becoming capacity constrained and a number of new plants were opened or are under construction to alleviate this situation.
In the UK, the resilience and inherent quality of our Food Manufacturing businesses resulted in another sound performance even though trading remained competitive. The retailers, in their drive to grow market share and hold down prices, are exerting considerable pressure on suppliers. This is not a new experience and management is addressing the challenge successfully through further innovation, new product development and identifying niche market growth opportunities. Deflation in raw material prices, especially wheat, affected unit revenues. While most of our food businesses consolidated their leading positions, the results of our cake and frozen foods businesses suffered. The net effect was to prevent the budgeted profit growth and trigger a series of short term and planned structural cost saving initiatives. We should start to see the benefit from these programs in the current year.
The acquisition of Martine Specialites in October 1998 has enhanced our presence in the fast growing market for frozen part baked bread and patisserie in Europe. Our partnership companies also made sound progress through developing their relationship with key customers including McDonald's, Pizza Hut and Marks & Spencer.
The majority of our operations in mainland Europe are in the Industrial & Automotive businesses. Growth has come from supplying power transmission products to the motor manufacturers in generally good conditions. The particularly competitive nature of the automotive hose and connector segment affected profitability and we have implemented additional cost reductions.
The results of our operations in Asia Pacific and Latin America continue to be influenced by the difficult trading environment. While economic stability is beginning to return in some territories, albeit at differing speeds, the difficulties in Japan show little sign of improvement. Brazil, which is an important market for our products, experienced a fall in demand as a result of its currency devaluation and high interest rates. We remain positive about the long term prospects for many of these territories, although it will be some years before a return to former rates of levels of economic activity and growth can be envisaged.
Capital expenditure
Investment in our businesses is vital to maintain efficiency and increase cost competitiveness. Each Tomkins operation is encouraged to identify opportunities, which satisfy our financial criterion of a four-year pre tax payback. Over the past twelve months we invested a record (pound)275.7 million, over 35% more than last year and well ahead of depreciation of (pound)175.6 million, on projects ranging from complete new manufacturing facilities to essential health and safety improvements. This commitment to the efficiency and development of our business is vital and will help to underpin future growth. At the year-end a further (pound)123.9 million of new investment had been authorized but was not yet spent.
During the year Air System Components and Ruskin each expanded capacity and opened manufacturing facilities in the Eastern United States. Work is well advanced on Lasco Fittings' 470,000 square foot plant in Tennessee. As the integration of Stant and Schrader into Gates continues, a new $7 million technical center was opened in Detroit to carry out product development and testing for the combined business. In the UK, R F Brookes' (pound)41.5 million state of the art food factory in South Wales is nearing completion.
Capital structure
We have returned in excess of (pound)658 million to shareholders through buying back and canceling 260.9 million ordinary shares, equivalent to 22% of our issued share capital, since the program commenced in September 1997. In the light of our cash resources, cash generation and anticipated investment requirements, the rate of repurchase accelerated in early 1999. Over (pound)142.5 million was spent repurchasing 62.8 million shares in January and February at an average price of 226.6 pence. On March 15 we announced a Tender Offer to repurchase up to a further 167 million shares, or close to 15% of our issued share capital. This was achieved with 166.9 million shares being repurchased on April 19 at 250 pence each; a total cost of (pound)421.1 million. The Tender Offer was approved by shareholders at an Extraordinary General Meeting on April 16, 1999, together with a resolution giving the Board permission to purchase up to a further ten percent of Tomkins' issued share capital before the Annual General Meeting, on September 24, 1999. At the AGM shareholders will be asked to renew this authority.
Share buy backs and add-on acquisitions are not mutually exclusive. The repurchase program has raised the efficiency of our balance sheet, while the strength of our cash flow ensures that we retain sufficient financial resource to capitalize on acquisition opportunities without imposing strain on our capital structure. The effect of the repurchase program is evident in our balance sheet at May 1, 1999, which has net debt of (pound)546.0 million, equivalent to gearing of 90.5%.
Tomkins' weighted average cost of capital improved to 8.2%, compared with 9.4% for the prior year. This substantial advance is attributable to a number of factors, the most important are the much higher amount of debt in our balance sheet as a result of the share buy-back together with the fall in long-term interest rates. Our post tax return on investment for 1998/99, before exceptionals and after adding back goodwill previously written off, was 10.6%, which compares very favorably with our weighted average cost of capital. We continue to achieve a return on investment substantially above our weighted average cost of capital, demonstrating that shareholders' funds are being invested to deliver value.
Corporate activity
The disposal program, an important element of the strategic process, maintained momentum; ten more businesses were sold, making a total of twenty-five over the past two years. These sales have enabled central management to focus on our major businesses. This enhanced attention has contributed to the general increase in operating profit and financial efficiency across our business sectors.
In April 1999 we completed the sale of four flour mills, as required by the Department of Trade and Industry following the Monopolies and Mergers Commission report on our purchase in March 1998 of six mills formerly owned by Spillers Milling. However, we remain convinced that the original transaction was in the interest of competition in the UK milling industry. The provision of (pound)40 million, announced in January, was based on our best estimate of the outcome at the time. Pleasingly, we were able to improve the terms on which we sold, such that the actual loss on sale was (pound)10.2 million less than anticipated.
Directors
Charles Gates has advised the Board that he intends to retire as a non-executive director. He joined Gates in 1946 and was ultimately Chairman and Chief Executive Officer of the Gates Corporation until its acquisition by Tomkins in July 1996, when he joined our Board. His experience and wise counsel have been of great value to us during the integration of the Gates' businesses and we wish him well. He will be replaced by Marshall Wallach, an investment banker, based in Denver who advises the Gates family interests and whom we have known for some years.
I am also pleased to report the appointment of David Newlands as an additional non-executive director. David is a chartered accountant who has recently retired as Finance Director of The General Electric Company plc; he is a non-executive director of a number of companies including The Standard Life Assurance Company, The Weir Group plc and Britax International plc. I am confident that his broad industrial and financial experience will be of considerable benefit to Tomkins.
These changes will take effect from August 1, 1999.
Outlook
We have announced today a further stage in Tomkins' evolution. We will move purposefully towards a corporate structure containing a narrower spread of growing core businesses. This will be a year of ongoing corporate activity and change as we implement our strategy in order to deliver further value to shareholders. We have the cash flow, balance sheet strength and management resource to develop a global presence as an engineering system and component manufacturer. Our existing construction, industrial and automotive companies provide a strong platform from which we aim to achieve our strategic and financial goals. The current year has started in line with expectations. The substantial opportunities offered by our evolving structure enable us to look forward with confidence to generating the returns expected by our shareholders.
Dividend Payment
The final dividend will be paid on October 11, 1999, to shareholders on the register at the close of business on August 20, 1999. The ordinary shares will trade ex-dividend from August 16, 1999.
Tomkins comprises a broad range of low-risk technology manufacturing companies. Tomkins' US interests include The Gates Rubber Company, Denver, the world's leading manufacturer of power transmission belts and a major producer of hose and connector products. Other interests include, Murray, Inc., Brentwood, Tenn., one of the leading US producers of power lawnmowers, snow blowers and bicycles; Red Wing Corporation, Fredonia, N.Y., the largest U.S. manufacturer of private label grocery products; and Tomkins Industries, Dayton, Ohio, a leading manufacturer of components for residential, commercial, and industrial buildings, materials handling and the transportation industry.
Tomkins shares trade in the U.S. 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.
Note to Editors: /a .U.S. Dollar equivalents are provided for reader convenience at the May 1, 1999 exchange rate of (pound)1=$1.6095.