27th Oct 2008 07:00
INTERIM MANAGEMENT STATEMENT
GKN plc today issues the following Interim Management Statement covering the period 1 July to 26 October 2008 and provides an update on its outlook for the year ending 31 December 2008.
Trading 3rd Quarter and Year to Date
In the 3rd Quarter Group sales at constant currency were slightly ahead of last year and reported Group profit before tax* was down by ‚£4m.
Overall Group trading for the nine months ending 30 September has remained ahead of the equivalent period of 2007. Total Group sales at constant currency were 7% ahead of last year and profit before tax* also showed a slight improvement. Raw material cost increases are now surcharged in arrears to most automotive customers and, adjusting for this lag, Group profit before tax* would be around 4% ahead which is below our expectations at the time of our Half Year Statement.
3rd Quarter Markets and Performance
Production in our major automotive markets was below the levels we expected in August, with our overall activity levels down around 5% on the 2nd Quarter run rate. Car and light vehicle sales have fallen globally, which will adversely impact 4th Quarter production schedules. Input cost pressures peaked during the period, with scrap steel reaching $870 per ton in July. Raw material costs have fallen sharply in recent weeks, with scrap steel now at $230 per ton.
Sales in our Automotive businesses including Powder Metallurgy expressed in constant currency were slightly down on 2007. Trading profits were also lower as a result of the more difficult market conditions, higher raw material costs and transactional currency impacts. Within this, Powder Metallurgy operated at break even in the period.
Aerospace markets have remained robust and in line with earlier expectations. The strike at Boeing's commercial aircraft facilities had little impact in the period although expectation is now for lower 4th Quarter demand.
GKN Aerospace continued to perform strongly, with revenues at constant currency up 10% and profits showing a strong improvement.
OffHighway markets have also generally remained solid and our business has continued to perform well, with a double digit increase in revenues and a strong profit contribution.
Sterling continued to be weak against the Euro throughout the period and also fell against the US Dollar and this has continued to provide an overall benefit to results.
In September we reached agreement with Airbus to acquire its Filton wing component manufacturing plant. The transaction remains on track for completion in January 2009.
At the same time we secured orders for wing components on the A350 XWB, which will provide an estimated ‚£1.2 billion of revenues over the life of the programme.
Also in the period agreement was reached with Finmeccanica with regard to the ‚£ 35m placed into escrow at the time of the disposal of our 50% share of AgustaWestland. Under the agreement the ‚£35m, together with accrued interest, was shared equally and, as a result, GKN received ‚£21m in the Quarter, of which ‚£3m has been credited to interest and ‚£18m to profit on sale of discontinued activities.
Outlook
Looking forward for the year as a whole, we are now experiencing significant further deterioration in demand in automotive markets globally. Our production schedules indicate 4th Quarter sales to be around 15% lower than last year with activity levels 20% below those at which we left the first half.
Strong action is being taken to flex operations, including plant shutdowns, short-time working and workforce reductions.
Notwithstanding these actions, it will take some time to fully readjust our operations and we therefore expect 4th Quarter Automotive profits, including Powder Metallurgy, to be only around 30% of 2007 levels.
In Aerospace, although the overall market remains robust, the Boeing machinists strike, if its effects continued through to year end, would reduce expected revenues in the Quarter by around 8%.
OffHighway order books remain strong in most market segments.
The market turbulence in automotive has led to cancellation of a small number of expansion projects and these, together with the potential 4th Quarter impact of the Boeing strike, will lead to a profit reduction of ‚£10 to ‚£12m in the period, which we do not expect to recur.
Overall, therefore, profit before tax* for the 4th Quarter and the year as a whole are likely to be materially below our mid-year guidance. We now expect Group profit before tax* for the year to be around 20% lower than 2007.
The Board will review the final dividend at the normal time in February against the background of the then prevailing market conditions.
Current Economic Environment
For 2009, although markets remain uncertain, we are currently planning our Automotive business to meet global production demand around 8% lower than this year. This level assumes further significant falls in demand in North America and Europe and no improvement in emerging markets.
In Civil Aerospace and OffHighway, lead indicators are now negative and we expect softening in demand in these markets in 2009. Favourable end market positioning, built-in labour flexibility and early management action should mean that reductions of up to 10% in these segments would have only a small impact on 2009 profits.
We expect the Aerospace Defence market to remain solid, with the US President's 2009 budget approved this month providing strong support to GKN's major programmes.
We are now finalising detailed plans to reposition our businesses to deliver acceptable profitability and cash generation through this difficult period.
The cash costs of this reorganisation will be largely covered by reductions in our capital investment programme, recognising the fact that our businesses have been well invested for growth in recent years.
We also expect to take an impairment charge of around $100m on the assets of our US "large segment" Sinter business where demand has now fallen significantly.
The major restructuring and repositioning of our businesses in recent years and the strategy to build leadership positions in diversified end markets gives GKN confidence in these difficult times.
These strengths and the additional reorganisation actions we are now taking should stabilise profitability in our Automotive businesses and provide a strong operating base for our Aerospace and OffHighway businesses. Against this background although 2009 earnings will be impacted by more difficult market conditions, benefits will also accrue from the inclusion of the Filton acquisition and from reorganisation.
Financing position
The Group's financing position is strong and steps have been taken in recent months to further substantially increase available committed bank facilities on reasonable terms.
At 30 September 2008, net borrowings were ‚£693m (30 September 2007 - ‚£736m) with the increase from June reflecting normal seasonal trends.
The Group's long-term funding arrangements comprise unsecured bonds totalling ‚£ 675m with the first maturity being in 2012, together with committed bank facilities which at 30 September totalled ‚£405m (‚£350m maturing in July 2010 and the balance in June 2013). During October an additional ‚£40m of committed bank facilities were put in place and on completion of the Filton transaction further committed facilities of ‚£180m will become available. The only covenant is that interest be covered at least 3.5 times by EBITDA. Cover is currently in the region of nine times.
This will bring the Group's total of long-term bond borrowings and committed facilities to ‚£1.3bn, a figure which the Board considers will provide ample headroom for the foreseeable future after taking into account the acquisition of Filton in January.
With determined management, market-leading businesses and financial strength, GKN is well positioned to weather these challenging global market conditions and to take full advantage as markets return to growth.
* Note: In this statement references to profit before tax are before restructuring and impairment charges, amortisation of non-operating intangible assets and other non-cash charges arising on business combinations, profits and losses on sale or closure of businesses and changes in fair value of derivative financial instruments.
Cautionary Statement
This press release contains forward looking statements which are made in good faith based on the information available to the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated.
A conference call for institutional investors and analysts will take place at 9.00am GMT on Monday 27 October 2008.
For further information:Investors:David RoodT: +44 (0)207 463 2382Jill MatthewsT: +44 (0)207 463 2364Media:Andrew LorenzFinancial DynamicsT: +44 (0)20 7269 7113M: +44 (0)7775 641 807www.fd.com
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