LONDON (Alliance News) - Engineer GKN PLC saw its shares dip early Tuesday as the group issued a cautious outlook for its key markets, undercutting in-line its report of organic sales growth in the first nine months of 2016.
GKN also said it will restructure its struggling Land Systems business, following a big asset sale last week. It will integrate the remaining parts of the business into other GKN divisions, meaning Land Systems will no longer be a stand-alone division of the group.
Nigel Stein, chief executive of GKN, said growth rates are set to slow in GKN's major markets, in line with wider macroeconomic trends.
He said the automotive market is set to see light vehicle production rise 1.0% in the fourth quarter of 2016, while new commercial aerospace programmes are ramping up at a slower pace than expected. Military aerospace programmes and agricultural markets are likely to continue to decline.
"Despite the slightly tougher macro-economic environment, the group continues to expect 2016 to be another year of growth," Stein said.
That caution, however, sent GKN shares down 2.0% in early trade on Tuesday to 316.70 pence, one of the worst performers in the FTSE 100.
GKN said sales in the nine months to the end of September totalled GBP6.90 billion, up 21% from GBP5.68 billion a year before, thanks to the contribution from Fokker, the Dutch aerostructures company that GKN acquired last year and currency gains. On an organic basis, stripping out the acquisition and currency boosts, sales were up 2.0%, in line with the company's expectations.
Overall group trading margins were slightly lower in the first nine months of the year, mainly due to the restructuring GKN kicked off earlier this year to cut GBP35.0 million in annual costs out of the business but also amid margin declines in its core Aerospace and Driveline businesses.
GKN's Aerospace arm, which which makes airframe and engine structures for planes, was in line with its expectations. Organic, constant currency sales in the division grew 2.0% in the first nine months.
Commercial aerospace sales were boosted by the ramp-up in production of Airbus's A350 and A320 jets and by Boeing's 737 plans, which offset lower sales on the Airbus A330 and A380 and the Boeing 777 programmes.
Military aerospace sales declined, reflecting the "mature" nature of ongoing programmes in this segment, in particular the Boeing F/A-18 Super Hornet fighter jet and the Sikorsky UH-60 Black Hawk helicopter.
Margins in GKN's Aerospace division were lower year-on-year, hit by a lower-margin revenue mix and slower-than-expected customer ramp-ups. Fokker has been integrated successfully, GKN said, but the cost of this work also dragged on margins.
GKN's other core unit, Driveline, which makes power-train systems for vehicles, saw stronger trading. Organic sales were up 6.0% year-on-year, helped by new programme launches and a strong market for premium vehicles. North America proved strong in the period, while the company outperformed the Chinese market despite a lower exposure to domestic brands and smaller vehicles.
Margins at Driveline were weaker year-on-year, however, due to significant costs from the launch of its US all-wheel drive programme. These costs are on a downtrend, GKN said, but will impact the second half of 2016 to the same degree as the first half.
Powder Metallurgy, which handles metal powder manufacturing used in making precision components, saw sales grow, and margins were slightly higher in the unit.
But GKN's Land Systems business, which makes power-management products for the agricultural, construction and mining industries, continued to suffer against rough end markets. Weak demand for agricultural equipment and the end of two chassis contracts resulted in an 8.0% decline in organic sales for Land Systems in the first nine months.
On Friday last week, GKN agreed to sell the Stromag unit within Land Systems to Altra Industrial Motion Corp for an enterprise value of EUR198.0 million. Stromag supplies brakes, clutches and highly flexible couplings to the agricultural, construction, industrial and renewable energy markets.
Following that sale, GKN will move its Shafts and Services units in Land Systems to Driveline, with its Wheels and Other Structures units to move to GKN's Other businesses unit. Land Systems will then cease to be a unit of GKN.
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