Trading update – brought forward by two probable significant external claims
13 October 2017
GKN plc, the global engineering business that serves the aerospace and automotive markets, today issues a trading update for the period since the half year results announcement on 26 July 2017, brought forward as a result of two significant external claims. As a result of these, together with continuing operational challenges in GKN Aerospace North America, the Group now expects management profit before tax(1) for 2017 to be slightly above 2016.
Significant External Claims
GKN has been made aware of two probable claims which are expected to result in a charge of around £40 million in the fourth quarter of 2017. One relates to GKN Aerospace and the other GKN Driveline. Both claims are commercially sensitive with no additional information disclosable at this time.
Overall in the third quarter, the Group achieved good organic sales growth, with GKN Driveline continuing to outperform the market and GKN Aerospace delivering sales slightly up on the prior year.
Group trading margin in the third quarter was lower than the comparable period in the prior year, mainly due to programme transitions and on-going operational challenges in GKN Aerospace North America.
In commercial aerospace, third quarter sales were marginally down whilst military sales were up compared to the prior year.
Current trading in the third quarter has been disappointing with a significant reduction in margin caused by on-going pricing pressure, continuing operational challenges and the impact of programme transitions. These headwinds are expected to continue throughout the fourth quarter, although, as planned and included in previous forecasts, the quarter should benefit from a positive one-off retrospective pricing adjustment of £20 million, which has recently been agreed.
Following a detailed review, GKN Aerospace North America will incur a £15 million non-cash charge at its Alabama, USA facility relating to revised assumptions on programme inventory and receivables balances.
Given the issues above, the review of the carrying value of goodwill and other assets at the year-end is expected to produce a significant non-cash impairment charge, relating to the North American business, which will be disclosed outside management profit before tax.
GKN Driveline continued to deliver good third quarter sales well ahead of global industry production rates that were up 2%. External forecasts continue to expect full year global auto production to increase by 2%, with North America and China down in the fourth quarter, and Europe continuing to experience robust demand. GKN Driveline expects to significantly outperform the market for the full year.
As previously advised, GKN Driveline’s trading profit continues to bear the additional costs of raw materials and eDrive investments. The North American all-wheel drive business is running well but its margin remains below the divisional average.
Including the impact of the claim, GKN Driveline’s trading margin for 2017 is expected to be similar to the prior year.
GKN Powder Metallurgy
GKN Powder Metallurgy’s organic sales growth continued in the third quarter in spite of a decline in US automotive production rates. It continued to benefit from currency translation and acquisitions in China and Turkey. The growth included the direct pass through of higher raw material prices which also had the effect of reducing reported margins slightly.
Nigel Stein, Chief Executive, GKN plc, commented:
"GKN continues to grow well against its end markets although recent margin performance has not met our expectations. In addition, it is disappointing that we expect to have to provide for two unexpected claims which will slow our steady growth in profits.
In light of the trading performance in North American Aerospace, we are redoubling our efforts to improve our operational performance in that business, as well as developing actions to accelerate margin improvement plans across the Group, including through the broader adoption of Industry 4.0.
With our excellent market positions and leading-edge technologies, I am confident that the Group is in a strong position and has a bright future.”
Full year results announcement
The full year results will be announced on 27 February 2018.
Trading update call
There will be a call for analysts and investors at 08:00 today (13 October). Dial in details are:
Direct dial: +44 (0) 203 139 4830
Conference ID: 26422862#
Participants joining the call from outside the UK can find a local number in the following file:
Conference ID as above.
A replay of the conference call will be available on the Group’s website:
GKN plc LEI: 213800QNZ22GS95OSW84
The information contained within this announcement is deemed by the Group to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.
Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries with the Group’s share of the sales and trading profit of equity accounted investments. References to trading margins are to trading profit expressed as a percentage of sales. Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations.
Investor Relations Director
T: +44 (0)207 463 2382
M: +44 (0)7739 778187
Andrew Lorenz, FTI Consulting
T: +44 (0)203 727 1323
M: +44 (0)7775 641807
This announcement contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast.
Notes to Editors
GKN plc is a global engineering group. It has three divisions; GKN Aerospace, GKN Driveline and GKN Powder Metallurgy, which operate in the aerospace and automotive markets. Over 58,000 people work in GKN companies and equity accounted investments in more than 30 countries. GKN plc is listed on the London Stock Exchange (LSE: GKN) and recorded sales of £9.4 billion in the year to 31 December 2016.