24th Apr 2018 09:45
LONDON (Alliance News) - Melrose Industries PLC on Tuesday said recent prize GKN PLC's performance in the first quarter of the year was below expectations, with operating profit falling sharply.
The FTSE 250-listed turnaround specialist - which last week said its reverse takeover offer for the blue-chip engineer has now become unconditional - on Tuesday said GKN's sales were broadly flat at GBP2.60 billion for the three months to the end of March, compared to GBP2.61 billion a year earlier.
However, operating profit declined significantly to GBP181.5 million from GBP215.1 million for the same period in 2017.
On a constant currency basis, sales grew 5.0% year-on-year, but operating profit was down 10%.
Melrose noted that GKN achieved sales growth "at the expense of operating margins", with GKN's operating margin for the period coming in at 7.0% compared with 8.2% for the first quarter of 2017.
Melrose said that GKN's Aerospace division sales fell 1% and the operating margin declined to 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," Melrose commented.
GKN's Driveline and Powder Metallurgy divisions delivered sales growth of 7.0% and 5.0%, respectively. However, the Driveline unit deliver sales growth at the expense of operating margin, Melrose noted, meaning profit was flat.
Net debt stood at GBP1.1 billion at the end of March, up from GBP889.0 million the year before, partly caused by the payment of GBP107.0 million of GKN deal fees. However, Melrose said it remains confident that debt levels at the end of 2018 will be consistent with its previous guidance.
Looking ahead, Melrose said that it forecasts an approximate 6% to 7% headwind from currency exchange rates for GKN's 2018 results.
Melrose said that GKN's underperformance in the first quarter gives the company a lower starting point than current market consensus. However, Melrose added that it believes it will be able to improve the performance of the GKN businesses over time.
"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," Melrose said.
Shares in Melrose were trading 1.3% lower at 221.65 pence early Tuesday.