Under-performing Land Systems weighs down GKN

THE strength of the global automotive industry has again proved the saviour of Midlands engineering group, GKN.

In a trading update for the nine months to September 30, the Redditch-based group said management sales increased 21%, including organic sales growth of 2% – a performance which was in line with expectations.

Management sales for the nine-month period were £6,895m (2015: £5,683m). The increase comprised £151m of organic growth, with acquisitions accounting for £587m and beneficial currency translations equating to £474m.

“Sales in the Automotive businesses continue to perform well against the market and the Aerospace division grew in line with our expectations,” it said.

However, it underlined that its Land Systems’ markets remained tough.

Last week it announced it was disposing of its Germany-based Land Systems subsidiary Stromag in a deal worth almost £177m.

In the sale announcement, chief executive Nigel Stein described the state of the division’s markets as “challenging”.

He said the plan was now to dissolve the Land Systems division altogether, with the various businesses within it transferring to other divisions.

For the first nine months, the group said trading margin was lower than the equivalent period last year. This was due to the start of the group-wide £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 – now trading as GKN Aerospace Fokker.

Operating cash flow was similar to the same period last year.

Across the group, GKN Aerospace sales in the nine months were £2,496m (2015: £1,756m), up 2% on an organic basis and beneficial currency translation of £126m.

Commercial sales were helped by the ramp-up in production of the A350, A320 and Boeing 737, which more than offset lower A330, A380 and Boeing 777 sales. Military sales were lower than the prior year, reflecting the continuing decline of mature programmes, mainly the F/A-18 Super Hornet and UH-60 Black Hawk helicopter.

GKN Aerospace Fokker, acquired in October 2015, added £580m of sales in the nine months. The integration plans are said to be progressing well and business 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. This and the inclusion of Fokker, led to lower margins than the same period last year,” it said.

Birmingham-based GKN Driveline saw sales in the nine months grow to £3,075m (2015: £2,665m). Organic sales increased 6%, against global industry production rates that were up 4%, and the division benefited from a currency translation of £238m.

The group said external forecasts continued to expect full year global auto production to increase by 3%.

“Strong organic growth above the market continued in Europe due to new programme launches and the strength of premium vehicles. GKN Driveline performed above the Americas market, helped by new programme launches in North America,” it said.

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

GKN Driveline’s margin was below last year’s equivalent period due to significant launch costs on a US all-wheel drive programme. However, these costs will decline, although it said the second half was likely to see a similar impact to the first half.   

In GKN Powder Metallurgy, sales in the nine months were £762m (2015: £694m). Beneficial currency translation was £64m. However, it said organic sales were flat, reflecting slower demand in North America, although this was partially offset by improved sales in Europe and Asia.

Sales in the Land Systems division were virtually flat at £534m (2015: £535m). Organic sales declined 8%, principally due to lower demand for agricultural equipment and the ending of two chassis contracts. These were partly offset by a £44m benefit from currency translation.

Following the sale of the Stromag business, GKN said its intention was to dissolve the Land Systems division with Shafts and Services moved to GKN Driveline and Wheels and Structures moving to Other businesses. The changes take effect from January 1, 2017.

Sales for GKN’s Other businesses fell to £28m (2015: £33m), which it said reflected the scale back of GKN Hybrid Power, which caused this segment overall to report a small loss in the period.

Mr Stein said: “GKN has continued to make progress. 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.

“In line with the global economic outlook, we see growth rates easing in our major markets. The automotive market is now forecast to see a 1% increase in light vehicle production in the final quarter. 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. Despite the slightly tougher macro-economic environment, the Group continues to expect 2016 to be another year of growth.”