Trading Update for GKN Prior to Melrose Ownership
The following is a trading update1 for GKN PLC (“GKN”) for the period prior to Melrose ownership, being the 13 weeks from 1 January 2018 to the 31 March 2018 (“the Period”). The results are sourced directly from the GKN Group management accounts which were produced prior to Melrose acquiring the business on 19 April 2018. Melrose had no part in their preparation and has made no changes to their presentation.
As expected by Melrose, and consistent with its acquisition assumptions, the GKN performance in the Period was below the levels seen in the corresponding period in 2017.
GKN PLC Group Trading
At Actual Exchange Rates
On a management basis as defined in the 2017 GKN Annual Report, GKN Group sales in the Period were £2,599 million (2017: £2,611 million), Group operating profit was £181.5 million (2017: £215.1 million) and Group operating profit margin was 7.0% (2017: 8.2%).
At Constant Exchange Rates
On a management basis GKN sales in the Period were 5% up on last year, however operating profit was 10% below the corresponding period last year. The first quarter results show a continuation of the trend noted by Melrose previously of GKN achieving sales growth at the expense of operating margins.
Aerospace showed the most variance in performance in the Period compared to the corresponding period last year with sales 1% down and operating margin falling further to approximately 5% as the North American business continued to struggle and was loss making for the Period. The operating performance of this business is unacceptable and addressing this is a key immediate objective.
The Driveline business delivered sales growth in the Period of 7% but at the expense of operating margin, meaning profits were flat.
Powder Metallurgy achieved sales growth of 5% in the Period with operating margins of approximately 11%.
GKN Exchange Rate Sensitivity
If exchange rates stay as they were at the end of March 2018 for the balance of the year, this will likely mean there is an approximate 6% to 7% headwind to the 2018 full year results compared to 2017.
Adoption of IFRS 15
Melrose notes that while IFRS 15 (Revenue from Contracts with Customers) was introduced on 1 January this year, GKN has yet to give specific guidance on the impact of these new rules. Melrose will issue guidance on the likely impact of the introduction of IFRS 15 on GKN’s revenue recognition at Melrose’s half year results announcement in the first week of September.
GKN Net Debt
GKN’s net debt at the end of March was £1,124 million, up from £889 million at the end of last year. The bigger than normal outflow in the first three months of the year of £235 million was partly caused by the payment of £107 million of GKN deal fees. These were higher than the deal fees previously announced by GKN and did not include the break fee payment due on the aborted Driveline sale to Dana Incorporated. In addition, in the first quarter GKN unwound approximately £150 million of creditor stretch that was imposed on suppliers to lower the GKN Group debt at the 2017 year end.
Despite these cash headwinds inherited from GKN, Melrose is confident its net debt levels at the 2018 year end will be consistent with its previous guidance.
The GKN PLC performance in the period before Melrose ownership showed trends below current market expectations for GKN for profit and cash generation. While this gives Melrose a lower starting point for GKN than current market consensus opinion, Melrose allowed for further underperformance by GKN prior to its ownership in its acquisition assumptions, and remains confident it will be able to deliver on all the statements it made during the offer period over the medium term, including creating significant shareholder value by improving the performance of the GKN businesses over time and being a responsible owner for all stakeholders.
When it announces its interim results in the first week of September 2018, Melrose looks forward to giving a comprehensive review of performance and guiding the market on its exciting plans for the long term future of the GKN businesses.
1The GKN management accounts for the three months ended 31 March 2018 are based on GKN accounting policies prior to the Melrose ownership of GKN and have not been subject to a detailed review by Melrose or audited or reviewed by either GKN or Melrose auditors. The results for the Period could therefore be subject to change post further examination and review by Melrose.
Nick Miles, Charlotte McMullen: +44 (0) 20 3514 0897