Our strategy
"We will focus on the rigorous execution of our four key priorities.”
"Since 2002 we have sold 18 businesses, refocusing the Group and improving the overall quality of our assets.”
Group priorities
The Board has set out four key priorities for management to pursue with greater focus going forward, namely: (i) Driving top-line growth; (ii) Managing the cost base to improve margins; (iii) Managing the balance sheet; and (iv) Reshaping the portfolio.
Our growth strategy encompasses three main elements, which are organic growth through product development based on innovation and technology, geographic expansion into high-growth developing regions and strategic bolt-on acquisitions.
Product development efforts in the Industrial & Automotive group are focused on addressing a number of critical environmental protection applications including fuel economy and emissions. Examples of our “green” automotive products, which individually contribute anywhere between 1% and 7% fuel efficiency savings, include six-speed automatic carriers, E3™ two-speed accessory drive systems, variable vane oil pumps, remote tyre pressure monitoring systems and electro-mechanical drive (EMD) mild hybrid systems. Additionally, we are expanding the proven sensing capabilities of our Schrader Electronics business into new niche industrial and automotive applications.
Product development efforts in our Building Products group are also focused on environmental protection or “green building” applications. Examples of our products with environmental applications include energy recovery ventilators, control dampers and economisers.
We continued to expand our presence in high-growth regions of China, India, Eastern Europe and Latin America. It is our aim to manufacture for these growing markets locally, whilst supplying some of our traditional markets from this lower-cost manufacturing base. We made good progress during 2007 with sales to China up by 37.3%, India up by 32.4%, Eastern Europe up by 25.5% and Latin America up by 16.6%. Since 2002, we have opened seven new facilities in China, four new facilities in India and three new facilities in Eastern Europe. In total over 20% of our manufacturing facilities are currently in low-cost countries.
In 2007, we maintained our pricing discipline on acquisitions and made progress with our stated strategy of bolt-on acquisitions. We acquired Swindon Silicon Systems during the third quarter as a bolt-on acquisition to Schrader Electronics. We have also recently completed two small, but meaningful bolt-on acquisitions for our ASC business in India in the commercial HVAC sector to capitalise on the infrastructure build in this region and the Middle East. We entered into a joint venture with Caryaire, a leading Indian manufacturer and distributor of HVAC products and, following the year end, we acquired a controlling interest in Rolastar, an Indian duct profile manufacturer, further bolstering our presence in this high-growth market. The integration of these recent acquisitions is progressing according to plan.
Since 2002, lean initiatives have been implemented across all of our manufacturing facilities. The focus has been on the elimination of waste, better utilisation of materials and floor space and the improvement of manufacturing processes. Lean initiatives save substantial costs every year, enabling us to maintain our margins and competitiveness and to reduce our capital expenditures.
We continue to focus on improving the overall effectiveness and efficiency of our supply chain management processes through a Group strategic sourcing initiative. Key priorities include leveraging our Group procurement volumes and increasing the amount sourced from low-cost countries. To help facilitate this initiative, central procurement offices have been established in both China and India.
We undertook a number of self-help actions in 2007 in order to reduce our cost base in light of difficult end markets. We reduced headcount across the Group in 2007 and accelerated our strategic manufacturing initiatives in our residential building products businesses by rationalising four plants.
We have recently initiated an acceleration of our existing restructuring initiatives to address our cost base, improve our competitiveness and increase our operating margins. This is a three-year programme that builds on our existing initiatives and should provide incremental benefits above the Company’s previous plans. Detailed plans have been put in place, which include outsourcing and off-shoring of central functions such as IT to low-cost countries, the stepping up of existing restructuring initiatives, low-cost country sourcing, and the expansion of pricing initiatives.
This programme is aimed at maximising efficiency across the Group over the next three years. Because of the outsourcing and off-shoring of central functions such as IT, restructuring costs are expected to increase to around £20 million ($40 million) in 2008, reducing to a historical run rate of around £15 million ($30 million) per annum in 2009 and 2010. Through this programme, we have identified the opportunity to capture approximately US$100 million of annual performance improvements by 2010.
We continue to focus on all aspects of cash flow and capital allocation including acquisitions, capital expenditure and working capital, generating a strong operating cash flow. Our objective is to be cash flow positive after interest, tax and dividends. We have recently implemented a Group-wide initiative aimed at reducing our investment in working capital and in addition, have continued to liquidate unproductive real estate assets. In 2007 we sold two properties, generating £12.7 million of cash.
We will also manage the efficiency of our balance sheet. It is our intention to maintain a strong balance sheet and our investment grade debt rating. The Board has decided that it will consider utilising an on-market share repurchase programme for between 5% and 10% of the issued share capital of the Company. We will remain flexible in relation to the timing and amount of the share repurchases, taking into account Tomkins’ share price, balance sheet and cash flow, and any opportunities that might arise to make strategic bolt-on acquisitions.
Since 2002 we have sold 18 businesses, refocusing the Group and improving the overall quality of our assets. During 2006 we announced our intention to dispose of a further four non-core businesses. In 2007 we successfully completed the sale of Lasco Fittings, Trico Wiper Systems and Dearborn Mid-West and we are now progressing towards the sale of Stant and Standard Thomson.
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