No matter whether one looks at the pro-forma, adjusted or the published statutory Half-Year results from Melrose this morning, they are at least better than feared!
In what by any standards imaginable has been a year of remarkable change for a company that six months ago very few had even heard of to becoming one that somehow managed to swallow a household name FTSE100 company such as GKN and then find itself included in the FTSE100 index is a remarkable achievement.
For all that, looking at the financial detail that Melrose has provided in its half year statement makes me rather glad that I am no longer an equity analyst! The shares are up a touch this morning but they are little changed from where they started the year before the hostile and just successful GKN bid.
Melrose tells its shareholders this morning that it is trading in line with the Board’s expectations for 2018. Pro-forma results, which assume that GKN had been owned for a full six months of the period as opposed to the 73 actual number of days that it was in the Melrose portfolio, show a profit before tax of £401 million and diluted earnings per share of 6.3p. Meanwhile, statutory results (these place GKN in for the actual 73 days that it had been part of Melrose at the half year end) show a loss before tax of £303 million and earnings per share in the red at 8.9p.
OK, so it’s all very complicated by timing and other maybe other one off factors and begrudgingly, even I would have to conclude that these figures are probably not that bad in the context of what Melrose has taken on. However, even though net debt is somewhat better than I had personally feared, I am still not sure that there was sufficient justification in these results for paying an increased dividend.
In respect of shareholder statement, Melrose says that GKN offers an outstanding opportunity which is meeting the Board’s expectations and that it has found no new ‘black holes’. It says that the GKN businesses are being managed successfully on a stand-alone basis, freed from head office bureaucracy and with medium and long term improvement plans agreed. Good and I agree but when all is said and done, GKN’s now closed head office was frankly tiny!
Now, as I know little if anything about the ‘other’ Melrose businesses apart from Brush Engineering which I see is now merged with GKN Off-Highway and the Wheels & Structures business, and that I have no contact or relationship with Melrose management team, I will leave others to take a view on whether progress has been made on the portfolio of other Melrose businesses.
Back within the GKN portfolio, Melrose says that GKN Powder Metallurgy, the world’s largest provider of powder metal solutions is implementing a margin improvement plan to ensure its profitability better reflects its leading position. Melrose reminds investors that advisors have been appointed to dispose of this ‘division’ and I continue to believe that this is one of the jewels in the crown of the GKN portfolio, one that was seriously undervalued in the overall GKN bid battle. I live in hope that a UK based business will take the opportunity to acquire this very successful enterprise and grow it further.
We will see when the operation is finally sold. In respect of the Powder Metallurgy business, Melrose reminds that this is a technology driven business and with wide scale implementation of automated production processes and globally connected systems, it has unique additive manufacturing capability and design flexibility. With a culture of innovation and continuous improvement supported by three Global Innovation Centres and over 500 engineers, GKN Powder Metallurgy has a strong track record of mastering new technologies ahead of its peers.
In respect of current operation GKN Powder Metallurgy continues to push into new geographies, establishing a new £17 million plant in Mexico with the first product expected to ship in 2019, as well as a clear acquisition strategy to further build on its leading position. The first hub of the planned additive manufacturing network in Bonn, Germany, is now fully operational, with further hubs planned in China and the US this year. Melrose says that GKN Powder Metallurgy is performing well, with significant opportunities to grow sales and margins. It is expected to continue to outperform in core geographies including North America, Europe and China, as well as benefit from exciting acquisition prospects to expand.
As to GKN Aerospace which Melrose reminds investors “is a leading global multi-technology tier 1 aerospace supplier, with manufacturing locations in 14 countries and serving over 90% of the world’s aircraft and engine manufacturers. It designs and manufactures innovative smart aerospace systems and components, with technologies used in aircraft ranging from the most used single aisle aircraft and the largest passenger planes in the world to business jets and the world’s advanced 5th generation fighter aircraft”.
The Melrose statement confirms that on taking control of GKN Aerospace they “supported management’s new strategic plan to start to reorganise the business globally around its three core capabilities: Aerostructures, which accounts for more than half of GKN Aerospace’s total revenue; Engine Systems, which accounts for approximately a third; and Special Technologies“ adding that they “inherited a business with challenges, particularly a loss-making business in North America with poor customer relationships. As a result, there has been an immediate concentration on ‘fixing’ key underperforming and historically underinvested Aerostructures sites in North America which is already delivering tangible results, both in terms of customer deliveries and stabilising key programmes. This process needs to continue and we are committed to delivering the necessary improvements including, where appropriate, rectifying long-term under investment in people, processes and capital equipment”.
In the Engines business Melrose tells us that “GKN Aerospace is well placed on more than 20 major risk and revenue sharing partnerships and cutting-edge technology, such as additive manufacturing, driving confidence in its performance in the second half of 2018 and beyond. Special Technologies continues to push the boundaries of technology, including developing an innovative hydrophobic coating for cockpit windows, currently undergoing performance assessment with Airbus on flight-test aircraft” and that in “Recognising that Asia will become the largest aerospace market by the mid-2030s, GKN Aerospace also further expanded into the region through a new fan blade repair centre in Malaysia, a new wiring facility in Pune, India, and the signing of a memorandum of understanding with Comac and AVIC in China for a new aerostructures joint venture. There have been a number of other material contract wins, such as the electrical wiring interconnection systems and junction boxes for Boeing on the 777, 737 and P8A aircraft and the manufacture of inner core fairings for Rolls-Royce’s Trent 1000 and 84,000lb-thrust Trent XWB engine programmes until 2026”.
In respect of GKN Automotive activities, probably best that for those interested I copy what they have said in the statement below:
“Our Automotive Division includes the GKN Driveline and GKN ePowertrain businesses, both leading automotive driveline technology and systems engineers utilising their global footprint to design, develop, manufacture and integrate an extensive range of driveline technologies for over 90% of the world’s car manufacturers. These businesses are market leaders in constant velocity joint systems, all-wheel drive and electric mobility and their technologies feature in everything from the smallest ultra-low cost car to the most sophisticated and dynamic premium and motorsport vehicles, with capabilities spanning two-wheel drive, all-wheel drive, hybrid or pure electric vehicle architectures.
As with Aerospace, this business has world leading technologies and removing the previous central management functions is enabling a re-motivated operational management team and employees to respond in improving the performance of their business. These results for the first time disclose the investment in eDrive where it is hoped GKN can play a leading part in this exciting new move to electric vehicles. We look forward to the progress we expect to see over the coming months and years.”
“During 2018, the market leading GKN Driveline business has focused on driving its technology leadership, commercial excellence and rigorous plant operational efficiency. We have agreed a strategy with the business and margin improvement workstreams are now in progress, with further automation upgrades being implemented alongside capacity management, as well as an overdue £10 million investment to expand its state-of-the-art Polish facility.
The 2018 half year performance is in line with expectations due to a successful programme ramp up in the Americas and Europe. The business is reacting quickly to flex operations to mitigate some headwinds and significant effort is ongoing to secure contractual customer recovery mechanisms to cover material cost increases. We have also initiated a joint indirect procurement initiative across this and the other core GKN businesses that will extend into 2019 and seeks to deliver significant savings and other permanent improvements.
While some improvements are already visible in the business and 2018 trading is anticipated to be in line with our expectations, the full benefit of this year’s investments will be seen in 2019 and beyond.”
“GKN ePowertrain is an all-wheel drive (“AWD”) systems integrator and pioneering electric powertrain (“eDrive”) systems engineer with more than 725,000 electric axle drives produced to date. A pipeline of over £2.5 billion for eDrive continues to grow and we have approved a number of investments to ensure it can meet this demand, including building a new facility in Japan, refurbishing an existing facility in Italy and opening a new facility in China intended to serve domestic customers, a key market for electric drive vehicles”.
CHW (London – 6th September 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785