The defence industry boss who is reshaping his firm for new realities

FOR Cobham’s chief executive Andy Stevens, life is measured out in five-year plans. The head of the FTSE 100 defence company first joined the business in 2003 as head of its aerospace division and played a key role in the 2005 strategic review that “took a root a branch look at our operations and decided to simplify the business.”

When the amiable Tipton-born engineer took over from former chief executive Allan Cook in January, he decided it was time to take another hard look at the business. He brought back consultants McKinsey, who had worked on the last five-year plan. Stevens also called back Peter Raby, who had been running a Cobham regional unit, and who joined the Dorset-based firm from McKinsey after the last review, to head office.

Raby was given the – somewhat grand – title of director of excellence in delivery to push through the current programme. The result – perhaps unsurprisingly – is the firm’s “Excellence in Delivery” review, announced in August alongside the firm’s half-year results.

The plan breaks down into two broad areas.

The company, valued at a cool £2.7bn, plans to sell up to 15 per cent of its hardware businesses, and it will streamline its 80 plants around the world, focusing on eight to 12.

In the meantime, the business that pioneered air-to-air refuelling, and was founded by British entrepreneur Sir Alan Cobham in 1934, will continue to acquire units funded by its £1bn war chest.

“We are pushing on with what we started in 2005,” says a talkative Stevens, speaking in a soft Birmingham accent in the London office of the firm, just off Park Lane.

“We always knew that once the business got to sales of around £2bn and grew north of 70 plants it would be time to look at how we would shape it for the next five years.”

Cobham is looking to sell around 15 per cent of its hardware businesses across three of its four divisions.

Units may be sold in its defence systems department, which makes up half of the firm’s sales. Or disposals may come at its avionics and surveillance division, or its mission systems business. All these units make high tech communications and surveillance equipment that integrate into military projects like the Eurofighter or commercial ventures like the Airbus A380.

Its fourth division, aviation services, is mainly a training unit.

Stevens says: “The type of units that will be sold are ones that have become commodity businesses, where the margins are lower.”

Across Cobham the business operates on a healthy 16 to 18 per cent margin, the kind of profitability that many other firms in other industries can only dream of.

But Stevens adds: “But these are not distressed businesses. This is not a fire sale. We plan to sell a number of units over the next two years assuming the conditions are right. If not we will keep hold of them until the market picks up.”

However, Stevens adds that the firm sent out books of information on a number of units last month and already a few have “moved pretty far down the line.” He expects to have made one or two sales by Christmas.

The company, which employs 12,000 staff over 80 sites across the world, also plans to streamline its operations over the next three years.

Stevens says: “We do a lot of good work at our plants, but sometimes we are guilty of reinventing the wheel. Sometimes plants work in a silo. We want to standardise production much more, which we think will also bring customers better quality products in a faster time period.”

The Cobham boss wants to concentrate up to 80 per cent of production across just eight to 12 plants. He plans to name his favoured factories at the end of November, and will then pour up to £150m of new investment into them to raise production standards. As 62 per cent of the firm’s sales comes from the US, Steven adds that “the majority” of his supersites will be based in America.

Plants will close, says Stevens, but he has no real idea how many at this stage. He adds that by the end of the three-year factory programme in 2013, he expects to save between £60m and £80m annually.

Stevens was right to take another look at Cobham’s operations because the financial crisis was beginning to penetrate defence spending, even though its main customer, the US government, is engaged in two wars – Iraq and Afghanistan.

Cobham in recent years had reported double-digit profit rises on the back of America’s war effort. But in August it posted a modest two per cent rise in pre-tax profit, excluding one-time items, of £145m, on sales up only one per cent at £963m.

Stevens blames the slowdown in US military expenditure – it spends $700bn (£443bn) on its annual defence budget (bigger than the next 19 nations put together) – for Cobham’s sluggish financial performance. He says: “The market has been slowing for the last 18 months, and I think it will take another 18 for it to gain real traction again.”

The Cobham chief adds: “What has been happening is that procurement officers are delaying spending after US defence secretary Robert Gates has talked about wanting value for money. Procurement officers are now getting auditors to go over deals that they would normally have signed off. And departments are now salami slicing orders. Where normally they would have ordered 100 units of something, they will take 20 and wait and see how long they can get away with this.”

The UK’s £38bn defence budget is also headed for cuts of up to 33 per cent in real terms over the next few year, to be finalised in the government’s October comprehensive spending review, but Stevens is less concerned about this.

He says: “The cuts in the UK will be serious, but we have three ongoing contracts with the government – the Eurofighter and electronic warfare and helicopter pilot training – and we feel these will survive the cuts.”

But Stevens does not think Cobham’s run of medium-sized and bolt-on acquisitions – 50 in the last nine years – is over even in this age of austerity.

Its most recent sizable deal was the acquisition of the radio business of US firm M/A-COM from Tyco Electronics for $425m in cash in May 2008.

And Stevens expects to make deals over the coming year.

He says: “We constantly track a range of companies. Many of the smaller ones are family owned and margins and profits are not the only thing that motivates them to sell. Part of my job is to remain close to the heads of these companies and always keep talking to them. So when they want to sell, they sell to us.”

Stevens is buoyed by the fact that since 9/11 warfare has moved in favour of the light high-tech boxes that Cobham makes.

He says: “Over the last ten years and going forward, there will be less tanks made, less manned aircraft and less ships.

“What governments want more of is sensors that bring voice, video and other data immediately from the battlefield to decision makers. We have invested heavily in this area, because we can’t see that this need will go away.”

Over the last five years Stevens says the firm has grown and boosted its brand recognition.

But over the next five he wants to see the firm unify its manufacturing processing, keep up its collaboration with larger players such as the UK’s BAE Systems and Europe’s EADS, and continue to look for high margin acquisition targets.

Cost-cutting is tough, but predicting global geopolitics is even harder. Cobham’s investors will be hoping that Stevens pulls all of this off.

CV | ANDY STEVENS
Age: 54

Work: Left school at 16 to become an engineer. Qualified as a chartered engineer at Dowty Group and subsequently became chief operating officer of Messier Dowty International.
Joined Rolls-Royce as managing director, Defence Aerospace. Joined Cobham in 2003 as managing director of Aerospace Systems. Became chief executive in January 2010.

Family: Married, two daughters

Lives: Cheltenham

Hobbies: Drives a Maserati Quattroporte. Also enjoys walking, landscape gardening and travel.