GKN Driveline presentation

LEI: 213800QNZ22GS95OSW84

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION.

 8 March 2018

GKN plc ("GKN")

GKN Driveline: Moving to world class financial performance

Introduction

On 14 February 2018, GKN announced details of its new strategy and transformation plan along with its cash improvement initiative ("Project Boost") and financial performance targets to the end of the financial year ending 31 December 2020.

Today, the GKN Driveline team will be presenting further details on how they intend to transform the Driveline business through Project Boost by delivering significantly improved margins and cash flows. They will also be presenting on GKN's strong positioning in China and GKN's world leading technology and unique positioning in the significant growth market of eDrive systems. 

Project Boost will fundamentally improve the cash and margin profile of GKN Driveline

By implementing Project Boost within the Driveline business, GKN expects to deliver £153m1 of recurring annual cash benefit from the end of 2020. In line with the overall Group strategy, savings are expected to be realised through four key levers - manufacturing excellence (representing £55m of the total recurring annual cash benefit)1, functional excellence (£30m)1, direct procurement cost savings (£35m)1 and indirect procurement cost savings (£33m)1.

Industry 4.0 is a very significant component of the manufacturing excellence programme for Project Boost in Driveline. Today's presentation will highlight how the GKN Driveline team are accelerating the implementation of Industry 4.0, including both automation and digitisation, to drive improvements in productivity, quality and safety across Driveline's global manufacturing footprint. In addition, the presentation will provide an overview of the direct procurement programme.

Driveline China - continuing 30 years of profitable growth

GKN Driveline was the first Western supplier to enter the Chinese market in 1988, through its joint venture with Hasco. This joint venture, Shanghai GKN Huayu Driveline Systems (SDS) will celebrate its 30 year anniversary in 2018. A 50 year extension to the joint venture agreement was signed in 2009.

Today, the SDS joint venture has a market leading position in driveshafts and all-wheel drive modules in China and will be implementing a separate SDS Boost programme focused on maintaining its strong margins. The SDS joint venture will be GKN's route to market for the eDrive Systems product segment in this very important market.

A world leader in eDrive systems

The global automotive landscape is changing with an accelerating shift towards hybrid and electric vehicles. GKN's focused and sustained investment in eAxle technology over recent years underpins its unique position in an eDrive system market poised for significant growth for decades to come.

With a substantial £2bn order book from global OEMs, driven by a strong heritage and award winning, "world first" innovations, GKN Driveline is leading the way in contemporary and electrified drivelines, with GKN eDrive Systems expected to deliver revenues of approximately £500m by 20222 and expected to meet GKN's core Driveline management trading margin target of ≥9.5% by 20253. In addition, with 30 years' experience in China and a track record of market leadership based on long-standing customer relationships, GKN Driveline is well positioned to capitalise on one of the world's largest and fastest growing potential market for eDrive systems.

Moving to world class financial performance

GKN Driveline now has both the capability and the strategic focus to capitalise on its investments and deliver substantial margin improvements and cash flow to shareholders. As outlined in its announcement on 14 February 2018, GKN is targeting a management trading margin of ≥9.5% by the end of 2020 in its core Driveline product segments.4 

Commenting, Anne Stevens, Chief Executive of GKN, said:

"Our Driveline business is perfectly positioned to take advantage of the changing automotive market.

With our world leading technology we have successfully pre-empted the needs of our customers and we will continue to do so.

We will continue to develop and deliver the technologies that will enable our customers to succeed while realising the full value of our business."

ENDS

1 This statement includes a quantified financial benefits statement which has been reported on for the purposes of the City Code on Takeovers and Mergers (the "City Code") (see Appendix 1). This does not take account of any relevant proportion of one-off associated incentive payments, which are estimated to be, in aggregate, in the region of £70m (to be satisfied in GKN ordinary shares) and which have not been reported on for the purposes of the City Code. Excludes impact of potential disposals.

2 Forecast is based on internal GKN business plan figures.

3 The trading margin target for 2025 should not be construed as a profit forecast or interpreted as such.

4 The trading margin target for 2020 should not be construed as a profit forecast or interpreted as such.

Contacts:

GKN plc

Guy Stainer, Investor Relations Director

Tel: +44 (0)20 7463 2382

FTI Consulting Limited

Andrew Lorenz / Richard Mountain

Tel: +44 (0)203 727 1340

Gleacher Shacklock LLP (Financial Adviser to GKN plc)

Tim Shacklock, Dominic Lee, Tom Quinn

Tel: +44 (0)20 7484 1150

J.P. Morgan Securities plc (Financial Adviser and Corporate Broker to GKN plc)

Robert Constant, Dwayne Lysaght, Stephen Smith

Tel: +44 (0)20 7742 4000

UBS Limited (Financial Adviser and Corporate Broker to GKN plc)

Hew Glyn Davies, James Robertson, Jonathan Retter

Tel: +44 (0)20 7567 8000

Publication on a website

In accordance with Rule 26.1 of the City Code, a copy of this announcement will be published on the GKN website (www.gkn.com) by no later than 12 noon on the business day following this announcement. The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

Analyst and investor meeting and conference call

There will be an analyst and investor meeting today at 2.00p.m. at UBS, 5 Broadgate, London, EC2M 2QS in their Auditorium located on the ground floor.

A live videocast of today's presentation will be available at http://lps.ggwebcast.com/gkn/36

Slides will be put onto the GKN website approximately 60 minutes before the presentation is due to begin, and will be available to download from the GKN website at: www.gkn.com

A live dial in facility will be available by telephoning:

Standard International Dial In: +44 (0) 203 0095710

UK Free Call Dial in number: 0800 376 7425

Conference ID: 8679737

Following the event, a replay of the conference call will be uploaded onto the GKN website and the on-demand archive webcast will be available via www.gkn.com

Note: Questions will only be taken at the event and the webcast and dial in facility will be turned off before the Q&A session commences.  

Further information

This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any securities whether pursuant to this announcement or otherwise.

The distribution of this announcement in jurisdictions outside the United Kingdom may be restricted by law and therefore persons into whose possession this announcement comes should inform themselves about, and observe, such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities law of any such jurisdiction.

Gleacher Shacklock LLP ("Gleacher Shacklock"), which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, is acting exclusively as financial adviser to GKN and no one else in connection with the matters set out in this announcement and will not be responsible to anyone other than GKN for providing the protections afforded to clients of Gleacher Shacklock or for providing advice in connection with the subject matter of this announcement or any other matter referred to herein.

J.P. Morgan Securities plc, which conducts its UK investment banking business as J.P. Morgan Cazenove, ("J.P. Morgan Cazenove") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. J.P. Morgan Cazenove is acting exclusively as financial adviser to GKN and no one else in connection with the matters set out in this announcement and will not regard any other person as its client in relation to the matters set out in this announcement and will not be responsible to anyone other than GKN for providing the protections afforded to clients of J.P. Morgan Cazenove or its affiliates, nor for providing advice in relation to any matter referred to herein.

UBS Limited ("UBS") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. UBS is acting exclusively as financial adviser to GKN and no one else for the purpose of the consideration of a proposed acquisition by Melrose and will not be responsible to anyone other than GKN for providing the protections offered to clients of UBS nor for providing advice in relation to the subject matter of this announcement or any transaction, arrangement or other matter referred to herein.

No profit forecasts or estimates

No statement in this announcement is intended as a profit forecast or estimate for any period.

In accordance with Rule 27.2(d) of the City Code, the directors of GKN (the "Directors") confirm that:

· the estimate for the RRSP derived net cash inflow for the year ended 31 December 2017 (the "Cash Flow Estimate");

· the forecast for the RRSP derived net cash inflow for the year ending 31 December 2018 (the "Cash Flow Forecast"); and

· the forecast for the RRSP derived net cash inflow for the years ending 31 December 2019-2055 (the "Long Run Cash Flow Forecast"),

each of which as set out in the announcement made by GKN entitled "GKN Aerospace: Generating value for decades to come" on 27 February 2018 (the "GKN Aerospace Announcement"), remain valid.

Each of KPMG LLP ("KPMG"), Gleacher Shacklock, J.P. Morgan Cazenove and UBS has also confirmed to GKN that the report that they previously produced in connection with the Cash Flow Estimate and Cash Flow Forecast (as set out in Parts B and C of Appendix 2 to the GKN Aerospace Announcement) continues to apply.

Quantified Financial Benefits Statement

The Quantified Financial Benefits Statement referred to in Appendix 1 to this announcement relates to future actions and circumstances which, by their nature, involve risks, uncertainties and contingencies and which may in some cases be subject to consultation with employees or their representatives. The targets, cost savings and efficiency gains referred to may not be achieved, or may be achieved later or sooner than estimated, or those achieved could be materially different from those estimated. For the purposes of Rule 28 of the City Code, the Quantified Financial Benefits Statement is the responsibility of GKN and the Directors.

Disclosure requirements of the City Code

Under Rule 8.3(a) of the City Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

Under Rule 8.3(b) of the City Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s), save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on +44 (0)20 7638 0129 if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

APPENDIX 1

QUANTIFIED FINANCIAL BENEFITS STATEMENT

The statements labelled by way of a footnote as including a quantified financial benefits statement in this announcement include "quantified financial benefits statements" for the purposes of Rule 28 of the City Code, which have been reported on previously (as set out in the final section of this Appendix 1) in accordance with the requirements of the City Code in the following form (the "Quantified Financial Benefits Statement"):

"The benefits of the Project Boost transformation plan are expected to deliver a recurring annual cash cost benefit of at least £340m from the end of 2020, with approximately 15% of this achieved in-year in 2018, increasing to 44% in 2019 and 81% in 2020.

Over 40% of the benefits are driven by world-class process improvement, implementing Industry 4.0 across the divisions and addressing underperformance in the US aerospace business. The remaining benefits are derived from improved procurement processes in both direct and indirect procurement, and other functional savings.

The nature of the programmes mean that there will be minimal jobs losses to achieve these benefits, but there will be an adjustment in working practices required to adopt the leading edge technologies.

Phasing

Boost benefits by division

In addition to cash flow generated by these benefits, we anticipate generating an average cash release through improvement in working capital management of £257million cumulatively in the period to the end of 2020, with an average working capital release of approximately £105m in 2018, £82m in 2019 and £70m in 2020. The benefits will come equally from payables (43%) and inventories (43%) with remainder coming from receivables (14%).

This will be delivered through both specific initiatives and as a result of embedding world class processes throughout the group.

The majority of the benefits are split broadly evenly between the two major divisions, Driveline and Aerospace. The Aerospace benefits are primarily focused on addressing existing operations in the US and embedding best practice processes across the division, whereas the Driveline benefits are primarily based on investment in technology.

We estimate that the Project Boost programme will require one-off costs to achieve of £450m with approximately 32% incurred in 2018, approximately 44% in 2019 and the remainder in 2020. Of this, approximately £134m will be investment in capital expenditure to facilitate the adoption of world class Industry 4.0 processes."

The Directors confirm that the Quantified Financial Benefits Statement remains valid and has been properly compiled on the basis of the assumptions contained below.

Bases of belief, assumptions and sources

The following approach and sources have been utilised in developing the Project Boost benefits case:

• Work streams led by GKN's Divisional CEOs have developed the Project Boost benefits case, including identification and quantification of estimates of potential benefits and associated one-off costs relating to the programme.

• In preparing the Quantified Financial Benefits Statement, the Divisional CEOs have been supported by functional management (and in several cases external advisors) to facilitate analysis and evaluation of the potential benefits available as a result of Project Boost.

• Where possible, estimated benefits and costs have been calculated on a bottom-up basis, however in circumstances where data has been limited, estimates and assumptions have been made by Management, with input from external advisors, to aid the development of individual benefits and one off costs.

• Cost bases used as the basis for the quantification exercise are a profit estimate for the financial year ended 31 December 2017 (see Appendix 1 of the announcement made by GKN on 14 February 2018 entitled "Moving GKN to world class financial performance") and audited financial results for the year ended 31 December 2016. Key sources of information used to develop Project Boost include financial results for the year ended 31 December 2017, audited financial results for the year ended 31 December 2016 and information from Management's Oracle Hyperion system.

• Benefits of growth in the businesses have been excluded.

• Assumed to be no significant changes in macro-economic conditions.

• Estimates of ongoing cost benefits and one-off costs have been phased over a three year period.

• The exchange rate used to convert between USD and GBP is 1.35 (GKN's 2018 Budget rate).

• A stretch case of benefits has been also been prepared.

Reports

As required by Rule 28.1(a)(i) of the City Code, KPMG, as reporting accountants to GKN, has provided a report stating that, in its opinion, the Quantified Financial Benefits Statement has been properly compiled on the basis stated.

Gleacher Shacklock, J.P. Morgan Cazenove and UBS, as financial advisers to GKN, have provided a report for the purposes of Rule 28.1(a)(ii) of the City Code stating that, in their opinion and subject to the terms of the report, the Quantified Financial Benefits Statement has been prepared with due care and consideration.

Copies of these reports are included in Parts B and C of Appendix 2 to the announcement dated 14 February 2018 made by GKN entitled "Moving GKN to world class financial performance" (a copy of which is available on the GKN website). Each of KPMG, Gleacher Shacklock, J.P. Morgan Cazenove and UBS has also confirmed to GKN that the report that they previously produced in connection with the Quantified Financial Benefits Statement continues to apply.

Notes

The assessment and quantification of the potential cost savings and efficiency gains of Project Boost relate to future actions and circumstances which, by their nature, involve risks, uncertainties and contingencies. As a result, the potential cost savings, efficiency gains and/or other expected benefits may not be achieved, or may be achieved later or sooner than estimated, or those achieved could be materially different from those estimated.

Due to the scale of GKN, there may be additional changes to its operations as a result of Project Boost. As a result, and given the fact that the changes relate to the future, the resulting cost savings may be materially greater or less than those estimated.

No statement in the Quantified Financial Benefits Statement or in this announcement generally should be construed as a profit forecast or interpreted to mean that GKN's earnings in the first full year following implementation of the Project Boost, or in any subsequent period, would necessarily match or be greater than or be less than those of GKN for the relevant preceding financial period or any other period.