GKN posts growth despite tough trading conditions

Aerospace and automotive engineering group GKN issued a trading update for the nine months to 30 September on Tuesday, with management sales increasing 21% to £6.9bn, including organic sales growth of 2% - or £151m - in line with expectations.

The FTSE 100 company said sales in the automotive businesses continued to perform well against the market and the aerospace division grew in line with expectations, though the land systems markets remained tough.

As it had previously anticipated, the group trading margin was lower than the equivalent period last year, which it put down to the commencement of the £35m restructuring programme, launch related costs in GKN Driveline, the absence of last year’s one-off benefits in GKN Aerospace and the inclusion of Fokker Technologies.

The board said operating cash flow was similar to the equivalent period last year.

GKN Aerospace sales in the nine months were £2.5bn, up 2% on an organic basis with beneficial currency translation of £126 million.

Commercial sales were helped by the ramp-up in production of the Airbus A350 and A320 airliners, and the Boeing 737 airliner which more than offset lower Airbus A330, A380 and Boeing 777 sales.

GKN said military sales were lower than the prior year, reflecting the continuing decline of mature programmes - primarily the F/A-18 Super Hornet and UH-60 Black Hawk helicopter.

Fokker Technologies - acquired on 28 October 2015 and now GKN Aerospace Fokker - added £580m of sales in the nine months.

The integration plans were progressing well, the board reported, and GKN Aerospace Fokker performed in line with expectations.

“For GKN Aerospace overall, the mix of new and mature programmes, together with slower than expected customer ramp-ups, restricted our ability to offset last year’s one-off benefits,” the board said in a statement.

“This and the inclusion of Fokker, led to lower margins than the same period last year.”

GKN Driveline sales in the nine months were £3.1bn, with organic sales increasing 6% - against global industry production rates that were up 4% according to the board - and beneficial currency translation of £238m.

External forecasts continued to expect full year global auto production to increase by 3%, the board added.

It saw strong, above-market organic growth continue in Europe due to new programme launches and the strength of premium vehicles.

GKN Driveline performed above the Americas market as well, which the board said was helped by new programme launches in North America.

Within Asia, sales growth in China was above the market too as new programmes and customer mix more than offset GKN Driveline’s lower exposure to domestic brands and smaller vehicles.

The division’s margin was below last year's equivalent period due to “significant launch costs” on a US all-wheel drive programme, as previously reported.

“These additional costs are now on a downward trend, although the second half is likely to see a similar impact to the first half,” the board explained.

GKN Powder Metallurgy sales in the nine months were £762m, up from £694m, with beneficial currency translation of £64m.

Organic sales were flat, the board said, reflecting slower demand in North America offset by improved sales in Europe and Asia.

There was also reportedly a negative impact on powder sales from the direct pass through of lower raw material prices, which helped GKN Powder Metallurgy report slightly higher margins than the comparable period last year.

GKN Land Systems sales in the period were £534m, marginally lower than the £535m reported for the same period last year, with organic sales declining 8%.

That was primarily due to weak demand for agricultural equipment and the ending of two chassis contracts, offset by a £44m benefit from currency translation.

On 21 October, GKN announced that it had agreed to sell the Stromag business for an enterprise value of €198m, with completion expected in the first quarter of 2017.

“From 1 January 2017, GKN Land Systems will no longer operate as a division, with Shafts and Services being reported within GKN Driveline and Wheels and Structures moving to Other businesses,” the board confirmed.

Sales for GKN’s other businesses fell to £28m, from £33m a year earlier, reflecting the scale back of GKN Hybrid Power, which caused the segment overall to report a small loss in the period.

“GKN has continued to make progress,” said chief executive Nigel Stein.

“Organic growth was 2%, whilst we also benefitted significantly from the successful acquisition and integration of GKN Aerospace Fokker as well as from favourable currency translation due to the weakness of sterling.

“As expected, our organic profit performance was down primarily due to one-off items, including the costs of the restructuring, which will position us better for the years ahead.”

Stein said in line with the global economic outlook, the board sees growth rates easing in its major markets.

“The automotive market is now forecast to see a 1% increase in light vehicle production in the final quarter [and] new commercial aerospace programmes continue to ramp-up, although at a slower rate than expected.

“Our military aerospace programmes and agricultural equipment markets look set to continue their decline,” he explained.

“Despite the slightly tougher macro-economic environment, the group continues to expect 2016 to be another year of growth.”