Tomkins Annual Report

Building Products

Terry O'Halloran, Chief Operating Officer

“Our leadership position in both brands and distribution resulted in a strong performance with increased market shares in major product categories.”

What do we do?

Our products are sold under strong brand names through manufacturers’ representatives, wholesalers, distributors and retailers. Our brands have leading market shares in most major product segments.

The Building Products group supplies a range of products to the commercial, infrastructure and residential construction markets, primarily within North America. Its portfolio comprises:
– Air Systems Components (’ASC’), which manufactures components for heating and air conditioning systems.
– Bathware, which manufactures baths, shower cubicles and luxury whirlpools.
– Philips, which manufactures windows for the residential and manufactured housing markets.

Market overview

The demand for ASC’s products is driven by commercial, infrastructure and residential construction activity. Non-residential activity remained steady during the year and our leadership position in both brands and distribution resulted in a strong performance with increased market shares in major product categories. This strength largely offset the reduced performance in residential categories resulting from the significant reduction in new housing activity in the US.

The demand for bathware products is driven primarily by new home construction. Although market share gains have been realised during this downturn, overall product demand has decreased significantly. The focus has been on realigning capacity with current demand levels and on increasing shares in the institutional and renovation markets with the introduction of new products to meet the needs of those sectors.

Philips’ sales have historically depended on manufactured housing and new residential construction. With the downturn in those markets, the focus is on growing our market share of vinyl windows in the residential replacement and renovation markets.

Strategic progress
Operations

During the year, we continued to focus on restructuring the production and distribution network to meet increasing demand for shorter lead times and the lowest possible delivered cost. Accordingly, there has been a continued focus on lean manufacturing, strengthening of regional manufacturing where lead times and shipping costs are critical, and relocation of production to lower cost facilities when possible.

Lean manufacturing efforts have been expanded along with concentration on value analysis of major product offerings. These efforts are now co-ordinated through a new group lean function, which was created during the year.

Regional manufacturing is the key to success for many products, which are configured to order and delivered with short lead times. Coupled with optimisation of our internal transportation fleet across the Building Products group, this will provide a competitive advantage going forward. Where regional manufacturing is not required to meet customer demand, the focus continues to be on relocation of production to low-cost countries. A number of high-volume products are sourced in China, and other production has been moved to existing and new facilities in Mexico.

In addition to this, we have adjusted capacity in anticipation of continued weakness in residential markets in the US. Manufacturing facilities have been closed in Pennsylvania, Texas, Georgia and California. Overall headcount was reduced in line with our reduction in sales.

Organic growth: new products

Our businesses are developing new products with emphasis on the needs of specific market areas. The group operates 12 independent laboratories, which continuously introduce new products to maintain our leadership role in both residential and non-residential markets. Our brands are well positioned to take advantage of green building initiatives driven by end customers around the world. Our current product line-up includes commercial energy-recovery ventilators for more efficient outside air management, variable-air volume control boxes, free-cooling economisers, outside air measuring and maintenance devices, tight-sealing dampers, permanent building sunshade devices, tighter sealing ductwork and energy efficient fan systems.

Geographic expansion

An increased emphasis has been placed on Asia and the Middle East as those markets continue to significantly expand in their non-residential construction sectors. In 2007, ASC entered into a joint venture in India with Caryaire to service that expanding market, and purchased a majority stake in Rolastar in 2008. After servicing the Chinese market from offshore for a number of years, we have begun production in China and are looking to expand that presence in the near future.

Strategic acquisitions

In addition to Caryaire, ASC has integrated the operations of Heat Fab and Eastern Sheet Metal, which were acquired in late 2006. These companies have provided important entries into specialised venting markets and spiral ducting for non-residential construction. Further acquisitions are under review to establish a stronger presence in important markets such as India, China and the Middle East.

Future priorities

With the continuing issues related to the credit markets and residential construction, we expect another difficult residential market in 2008 with further declines from 2007. Some softness is also expected in non-residential markets. Our primary focus going forward is on operating costs, with further adjustments to reduce our fixed cost base in line with market activity. Additional consolidation of manufacturing operations to lower cost areas will be pursued, further acquisitions are anticipated, and our Asian and Middle Eastern expansion will continue. We believe the actions we have put in place will allow us to outperform the markets during this downturn and position us well for an eventual recovery in our end markets.