GKN has unveiled 2017 Group profit before tax down 16% to GBP572m (US$786m) with its Driveline division showing organic sales growth of 9%.

The British supplier – subject of a bid from manufacturing investor, Melrose – says the Driveline growth was "significantly ahead of global auto production, helped by our broad geographic footprint and strong positions on high growth global platforms," while its eDrive order book extended to more than GBP2bn.

"GKN has fantastic businesses which have grown organically above our key markets, demonstrating our strong positions and technology," said GKN chief executive, Anne Stevens.

"However as I set out two weeks ago, we now need to change our emphasis and ensure those orders deliver world class financial performance with a renewed focus on strong margins and cash generation.

"With Project Boost, I have laid out how we plan to achieve this, through detailed product segment strategies and an emphasis on manufacturing and functional excellence."

The supplier also provided further information on plans to separate its Aerospace and Driveline businesses. GKN is in the process of separating operationally and the board has determined to formally separate GKN Aerospace and GKN Driveline into two listed companies via a demerger.

The aim is to complete the demerger in the middle of 2019, creating two companies with investment grade balance sheets which can support their share of the Group's pension liabilities. The basis on which to progress these discussions has been agreed with the UK Pension Trustees.

A demerger represents GKN's base case separation structure for a number of reasons, including that the timetable is within GKN's control, it allows GKN to allocate liabilities appropriately and it is tax efficient, maintains the company.

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Group Highlights(a)

Results in line with previous guidance

Management sales up 11% (organic sales up 6%), exceeding £10 billion for the first time;

Excluding £112 million North American Aerospace balance sheet review adjustments:

Operating profit (management basis) of £774 million (2016: £773 million);

Earnings per share up 2% to 31.7 pence (2016: 31.0 pence);

Reported profit before tax £658 million (2016: £292 million), a rise of 125%(c);

Pensions progress - UK defined benefit scheme closed to future accrual, £250 million lump sum paid to reduce the deficit and the level of future deficit recovery payments;

Free cash flow of £207 million (2016: £201 million).

Technology investments continue to deliver business results

Strong technology pipeline; innovation recognised by customer and industry awards;

Order book on electrified drivelines reaches more than £2 billion;

Ramp up of new engine deliveries to increase significantly;

Breakthrough contracts in place in GKN Powder Metallurgy additive manufacturing for major auto OEMs; selling product profitably today.

New product segment strategy and Project Boost announced and being implemented

Expected to generate £340 million p.a. of recurring cash benefit from end of 20201;

Targeting up to £2.5 billion cash return to shareholders over the next three years2;

New core segment trading margin targets for 20203: GKN Aerospace at least 14%, GKN Driveline at least 9.5%, Group 11%;

Aim to formally separate GKN Aerospace and GKN Driveline into two listed companies via a demerger in the middle of 2019.

 Management basis(a)Statutory basis

 2017(b)2016Change20172016Change

 £m£m%£m£m%

Sales10,4099,414+119,6718,882+10

Operating profit662773-14699335+109(c)

Trading margin (%)6.4%8.2%-180bps   

Profit before tax572678-16658292+125(c)

Earnings per share (p)26.6p31.0p-1429.3p14.1p+108(c)

Dividend per share (p)9.30p8.85p+59.30p8.85p+5

Free cash flow207201    

Net debt889704    

(a) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis.
(b) Including £112 million North American Aerospace balance sheet review adjustments.
(c) Primarily higher due to mark to market valuation of FX contracts.

Commenting on the results, Anne Stevens, Chief Executive of GKN said:

"GKN has fantastic businesses which have grown organically above our key markets, demonstrating once again our strong positions and leading technology. However as I set out two weeks ago, we now need to change our emphasis and ensure that those orders deliver world class financial performance with a renewed focus on strong margins and cash generation.

"With Project Boost, I have laid out how we plan to achieve this, through detailed product segment strategies and an emphasis on manufacturing and functional excellence. We are excited about delivering these plans."

Highlights

Group

Strong sales growth continued, up 6% organically;

Accounting deficit for UK pension reduced by 44% to £675 million, with deficit recovery payments falling to £36 million p.a. from 2018;

Trading margin reduced to 7.4% (2016: 8.2%, including £39 million restructuring costs), excluding the £112 million North American Aerospace balance sheet review adjustments, of which £4 million are included in corporate costs.

GKN Aerospace

Headline sales growth of 6%; 2% organic growth was ahead of the market;

Around $4.1 billion of new and replacement work packages won over contract lives;

China JV MOU signed with Comac and AVIC;

Additive manufacturing (AM) partnerships with US Department of Energy's Oak Ridge National Laboratory and Saab;

Trading margin of 7.8% (2016: 9.9%), excluding the £108 million balance sheet review adjustment. The most significant factor was the performance of the US Standard Aerostructures business which reported a trading loss for the year.

GKN Driveline

Organic sales growth of 9%, significantly ahead of global auto production, helped by our broad geographic footprint and strong positions on high growth global platforms;

eDrive order book extended to over £2 billion;

PACE Innovation Award for the integrated co-axial eAxle on the Volvo XC90 T8 twin engine;

Electrified driveline programmes launched in China JV (SDS);

Trading margin of 7.1% (2016: 7.2%, restated), with a good performance in Europe offset by reduced profitability in the North American AWD business, increased eDrive R&D investment to drive future growth, warranty claims and raw material headwind.

GKN Powder Metallurgy

Organic sales growth of 5%;

Acquisition of Tozmetal in Turkey;

Titanium powder production for AM started with partner TLS Technik;

Launched InstAMetal, digitized metal AM quoting, design and prototyping experience;

Trading margin of 10.6% (2016: 11.4%), principally reflecting higher raw material surcharge and investment in high-end powder capability in China.

New strategy and "Project Boost"

As set out in our announcement of 14 February 2018, the Board of GKN has concluded a wide-ranging strategic and operational review, which started in 2017. This review focused on both capital allocation discipline and a transformation programme aimed at improving cash flow and margin ("Project Boost").

This new strategy differentiates core product segments into improve, grow and develop, with each strategy having different capital expenditure targets and different expectations for growth, margin improvement, cash generation and return on investment. Core division margin targets for 2020 have been set, at least 14% for GKN Aerospace, at least 9.5% for GKN Driveline and 11% for the Group3. The Project Boost transformation plan is expected to deliver recurring annual cash benefits of £340 million from the end of 20201.

The new strategy has a clear framework that is expected to result in significant cash returns to GKN shareholders. The strategy includes a plan to sell Powder Metallurgy, as well as a number of other non-core businesses. GKN's progressive dividend policy will be to target an average payout of 50% of free cash flow over the period of 2018 to 2020. In addition, GKN expects to distribute surplus cash to shareholders, subject to maintaining an investment grade credit rating. In total, GKN is targeting returns of up to £2.5 billion to shareholders over the next three years, with a significant part expected to come from divestments executed within the first 12 to 18 months, including the sale of Powder Metallurgy.

Outlook

The Group's revenue expectations in the short term are unchanged.

GKN Aerospace's underlying trading margin is expected to show a slight improvement in 2018, despite some further contractual price downs and increased investment in new engine programmes. In 2019, the trading margin is expected to reach around 10% for the Division, on the way to the 2020 target of at least 12% for the Division and 14% for the core aerospace segment, together with strong cash conversion.

In GKN Driveline, solid trading margin progression is expected in both 2018 and 2019 as the Division works towards achieving its core segment trading margin target of at least 9.5% in 2020. Cash conversion is expected to improve significantly during 2018 and thereafter.

GKN Powder Metallurgy's trading margin is expected to show steady progression in 2018 and 2019 as it works towards achieving its 2020 target of at least 11%. Its future is expected to be very strong with great prospects in China, Brazil and India in addition to the good opportunities on high end technology business in Europe and North America. Operating cash flow is expected to remain strong.

Separation

GKN is today providing further information on its plans to separate its Aerospace and Driveline businesses. GKN is in the process of separating operationally and the Board has determined to formally separate GKN Aerospace and GKN Driveline into two listed companies via a demerger. The aim is to complete the demerger in the middle of 2019, creating two strong companies with investment grade balance sheets that can support their share of the Group's pension liabilities. The basis on which to progress these discussions has been agreed with the UK Pension Trustees.

A demerger represents GKN's base case separation structure for a number of reasons, including that the timetable is within GKN's control, it allows GKN to allocate liabilities appropriately and it is tax efficient.

Original source: https://www.gkn.com/en/newsroom/news-releases/Financial/2018/gkn-plc-results-announcement-for-the-year-ended-31-december-2017/

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