- Sales up 3% despite weakness in most major markets - strong growth in automotive emerging markets
- Results impacted by £17 million increase in UK pension deficit charges - underlying PBT broadly level excluding deficit cost
- £41 million reduction in net borrowings
- Dividend increase 2.7% to 11.6p per share
- Substantial new business wins across the Group
- Driveline - 29 new programmes
- Aerospace - $2 billion future business potential
- Powder Metallurgy - $150 million of new business
- Strategic initiatives launched to provide future benefits of £60 million a year by 2007
"GKN's results in 2003, delivered in some difficult markets, confirm our long-standing reputation for consistently high levels of
operational and financial management as well as our success in building strong positions in automotive and aerospace markets.
"Our principal challenge in 2003 was declining light vehicle production in North America, Western Europe and Japan and depressed
conditions in civil aerospace.
"However we were able to take full advantage of the growth in automotive output in emerging markets and the continued strength of
military aerospace programmes. Our Driveline business and AgustaWestland both delivered strong performances at the top end of our
expectations.
"We have also been successful in winning substantial new business from our global customer base and there was strong order intake across the
entire Group. In Automotive, Driveline won more than 70% of all available new CVJ programmes, Sinter Metals won $150 million of new orders and in
Aerospace our technology has won us positions on all the important new aircraft under development in Europe and the US.
"Underlying profit before tax* was down on last year. The 8% reduction was largely caused by increased UK pension deficit charges of £17
million, without which we would have been close to last year.
"GKN's recognition of its pension fund obligations saw the Group contribute £44 million of cash in 2003 towards the deficit alone.
In spite of that our cash performance was encouraging. Despite increased pension contributions we have reduced net debt for the
second successive year."
(* Profit before tax, goodwill amortisation and impairment and exceptional items)
GKN Driveline has been a consistently high performing business. During 2003 and early 2004, we undertook a full review of our current
Driveline manufacturing and business footprint to assess its future suitability for our key global markets. As a result of this strategic
review we have now decided to embark on a programme of reorganisation which we are confident will provide a platform to significantly
improve the quality of earnings in our core Driveline business and position us well to serve the future needs of our customers.
Our major markets of Western Europe and North America have provided little overall market growth in recent years with intense competition
amongst manufacturers putting increased pressure on pricing and productivity. In contrast the emerging markets in South America, Asia
and Eastern Europe are providing strong growth in automotive production and we have continued to successfully build our presence in all
three regions, which also offer potential to provide much lower cost sources of supply.
To take advantage of this opportunity we have developed a global manufacturing strategy for our Constant Velocity Joint (CVJ) business
which today represents 75% of our Driveline sales. Over the next three years we will migrate about 20% of our global production from
high cost to low cost economies so that by 2007 over 50% of our CVJ manufacture will be sourced from low cost locations. This will
require a significant realignment of our manufacturing network.
Detailed plans are being prepared to deploy this strategy and will be announced in due course. We expect that the exceptional
cash costs of restructuring in Driveline will average around £35 million per year over the next three years, with additional
non-cash costs being likely in 2004. Total exceptional costs, which should not exceed £150 million, will be finalised as the
detailed plans are approved. Any additional capital expenditure required should not increase the Group's overall level of
expenditure above the normal level of 110%-120% of depreciation.
Although there will be little benefit from this strategy in 2004, by 2007 we estimate full year profit benefits from completion of
this exceptional restructuring to be in the region of £40 million a year.
Although our success in winning new orders in US Sinter should lead to a resumption of growth in 2006, this recovery is at an early
stage. We intend to support recovery and underpin its base by further reducing costs and focusing activities on our areas of
technological advantage. Additional restructuring is therefore expected in 2004. Detailed plans are being developed and will be
announced in due course.
In addition, across the Group as a whole we intend to realign overhead expenditure to better reflect the future shape of our
business and reduce costs.
The cash costs of restructuring US Sinter and realigning our cost base across the Group are expected to total some £30-£40
million, falling largely in the next 12 months. The impact of these actions on the carrying value of related assets will be
revisited as the detailed plans are developed.
In summary, by investing in reshaping Driveline, by supporting US Sinter recovery and by realigning our cost base, we will
build a stronger business in a world which still offers excellent opportunities for growth. The measures outlined above
will leave GKN well positioned to take full advantage of these opportunities. In total we estimate the exceptional cash
cost of restructuring over the next three years to be some £140 million, with some £90 million likely to be charged to
operating profit in 2004, together with any non-cash write-offs required as the detailed plans are developed. Our initial
scenario planning indicates that such charges might be in the region of £60-£80 million, broadly shared equally between the
two projects. The cash flow impact in 2004 should be some £50 million. Benefits in 2004 will be small, but will
incrementally rise to an estimated £60 million a year by 2007 giving an overall cash payback of just over three years.
The maximum cumulative cash outlay is likely to peak at around £80 million in 2005, well within the funding capacity of the Group.
In contrast to the declines of recent years there is now a more positive outlook for our major markets. Automotive production
is forecast to increase slightly in North America whilst in Europe volumes are expected to be level or marginally ahead of 2003.
Continuing strong demand is expected in most of Asia Pacific. In aerospace military demand looks set to remain strong with civil
demand at its cyclical low.
However, competitive pressures in all our markets are expected to remain intense, exacerbated by increasing pressure from rising
world raw material prices. The Group's global footprint means that the proportion of sales exported from one currency region to
another is relatively small but the fall in the US dollar will affect approximately £150 million of exports from Europe to the US
as the hedging cover now in place is at lower average rates than in 2003.
Against that background, the Group expects to make further improvements in its underlying operational performance although the
overall result will be impacted by the charge relating to UK pension deficit costs increasing from £23 million to £40 million,
as previously indicated.
Looking further ahead, GKN will continue to focus on its core strengths: technology, exceptional customer service and
performance and, with the benefits of the strategic initiatives outlined above, the Group will continue to move forward
with confidence.
The full text of the Operating and Financial Review which will appear in the Annual Report & Accounts together with
Financial Statements and selected notes extracted from the audited accounts is attached to this press release which
may be downloaded below.
Download Operating and Financial Review here
Download selected notes from the accounts here
Further enquiries: GKN Corporate Communications
Tel: 020 7463 2354
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