GKN board points to growth as Melrose vultures continue to circle

Amid an ongoing war of words with Melrose over the latter’s takeover bid, GKN issued a set of results in line with its previous guidance on Tuesday and announced the aim of separating its aerospace and Driveline businesses into two listed companies via a demerger in the middle of 2019.

The FTSE 100 company reported management sales growth of 11% and organic sales growth of 6%, exceeding £10bn for the first time to £10.41bn, while on a statutory basis, sales were ahead 10% at £9.67bn.

Operating profit on a management basis rose to £774m from £773m, with earnings per share up 2% to 31.7p, although those figures excluded £112m in North American Aerospace balance sheet review adjustments.

Reported profit before tax surged 125% to £658m.

The company also reported pensions progress, with its UK defined benefit scheme closed to future accrual, a £250m lump sum paid to reduce the deficit and the level of future deficit recovery payments.

Free cash flow reached £207m, up from £201m.

On the operational front, GKN said technology investments were continuing to deliver business results.

It reported a “strong” technology pipeline, claiming its innovation was recognised by customer and industry awards.

The company’s order book on electrified drivelines reached more than £2bn, with the board reporting that the ramp up of new engine deliveries was set to increase significantly.

It also said “breakthrough contracts” were in place in GKN Powder Metallurgy additive manufacturing for major auto original equipment manufacturers, adding that it was selling product profitably today.

During the year, and in a bid to ward off the circling vultures of Melrose, GKN announced a new product segment strategy and its ‘Project Boost’, which was being implemented.

The strategy was expected to generate £340m per annum. of recurring cash benefit from the end of 2020, with the board targeting up to £2.5bn in cash return to shareholders over the next three years.

New core segment trading margin targets for 2020 were also announced, with GKN Aerospace aiming for at least 14%, GKN Driveline at least 9.5%, and the group 11%.

the GKN Aerospace team will be presenting further details on the scale of the upside opportunity for GKN Aerospace, including its ability to deliver higher margins and cash flows through Project Boost. They will also be presenting on the attractive long-term cash flow profile of GKN's Aero Engine risk and revenue sharing partnerships ("RRSPs").

AEROSPACE PLANS UNVEILED, MELROSE UNIMPRESSED

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

Management also unveiled new plans for aerospace that are expected to deliver £160m of recurring annual cash benefit from the end of 2020 by focusing on manufacturing excellence, functional excellence, direct procurement cost savings and indirect procurement cost savings.

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

“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.”

Stevens said that with Project Boost, she had laid out how the company planned to achieve that , through detailed product segment strategies and an emphasis on manufacturing and functional excellence.

“We are excited about delivering these plans.”

Melrose piped up with a response statement later on Tuesday to say it felt the announcement from GKN "adds little to the debate about which management team is best equipped to transform the business". It added that margins at all three divisions "continue to fall and US Standard Aerostructures is loss-making", that profits are up "just £1m" despite an increase in sales of £1bn, without taking into account the £112m writedown.

"Continued poor cash management is the order of the day, with debt some £80m higher than consensus," Melrose added.

Melrose chairman, Christopher Miller, said: "Today's statements are full of long-term promises and more short-term actual misses. They include a rushed plan to demerge aerospace and automotive, which begs the question whether the priority of Project Boost has been superseded by the dismemberment of GKN in the next 15 months.

"At the heart of this is a plea for the incumbent team to embark on an unproven and risky plan which we believe is wrong for all GKN stakeholders and UK plc as a whole. GKN deserves better than this: we believe Melrose is the only team with the ability to unlock its true potential."