As set out in its announcement of 12 January 2018, the board of directors of GKN (the “Board”) commenced a wide-ranging strategic and operational review of the business of GKN in 2017. Today, GKN announces further details of its new strategy and transformation plan along with its cash improvement initiative (“Project Boost”) and outlines the financial performance targets for GKN and its subsidiaries (the “Group”) to the end of the financial year ended 31 December 2020.
- GKN already has world class businesses and technology and now intends to move towards world class financial performance
- GKN has a new strategy, new leadership team and new execution engine
- There are three components in the new strategy:
- Deliver distinct strategies for different product segments with rigorous capital allocation and focused performance targets
- Establish a delivery culture based on greater accountability, capability and pace, supported by aligned incentives
- Separate operationally now and formally when it maximises shareholder value – operational separation of the Aerospace and Driveline divisions has already begun
- The Board expects Project Boost to deliver a recurring annual cash benefit of £340m from the end of 20201
- The Board is targeting up to £2.5bn cash return to shareholders over the next three years, with a significant part expected to come from divestments executed within the first 12 – 18 months, including the sale of Powder Metallurgy
- GKN’s progressive dividend policy will be to target an average payout of 50% of free cash flow over the period of 2018-2020
- GKN expects to distribute surplus cash to shareholders, subject to maintaining an investment grade credit rating
Anne Stevens, Chief Executive of GKN plc, said:
“The new strategy brings clarity, accountability and focus to GKN’s world class businesses and will allow the Group to attain world class financial performance.
“GKN has great technologies and great people. We have strong market positions and have delivered good growth, with management revenues last year of over £10bn. But too often we pursued growth at the expense of returns, this will no longer be the case. The new strategy brings discipline, both financial and operational.
“We are bringing clarity to our objectives through distinct strategies for different product segments, with rigorous capital allocation and focused performance targets. We are establishing a delivery culture based on greater accountability, with incentives aligned to specific team targets. And we are bringing greater focus, with our divisions now being run as separate operations.
“This strategy is expected to generate significant cash for shareholders in the short term and meaningful sustainable cash flows over the mid to long term. We expect to deliver £340 million of recurring annual cash benefit from the end of 20202 and are targeting a return of up to £2.5 billion to our shareholders over the next three years, with a significant part expected to come from divestments executed within the first 12 –18 months. We have a plan and we are dedicated to delivering it.”
GKN has world class businesses with huge potential
GKN has leading technology and market positions in the aerospace and automotive sectors, with strong and long standing customer relationships supported by its global manufacturing and engineering footprint. Through GKN’s sustained focus on R&D and investment, GKN has not only a strong business today, but a strong business for tomorrow, with leadership positions in a number of large, rapidly growing markets such as Aero Engines, eDrive Systems and Aero Additive Manufacturing. GKN has made significant long term investments which the Board expects will generate considerable growth, profits and cash flow for decades to come. The Board believes GKN’s shareholders should receive 100% of the benefit of these investments.
GKN’s new leadership team has a strategy to substantially improve cash flow and shareholder value
GKN has been successful in building global businesses and delivering above-market growth, creating a company with annual sales of £10.4bn in the financial year ended 31 December 2017. However, this has at times been at the expense of maximising margins and cash generation. The Board has recently appointed two highly qualified new executive leaders who are addressing this, ensuring that GKN focuses on margin and cash generation.
Anne Stevens, Chief Executive, has extensive experience in the businesses of GKN’s core divisions. She also has a proven track record of performance improvement. Jos Sclater, Finance Director, combines 20 years of acquisition and divestment experience with an in-depth knowledge of GKN’s business and strong working relationships with key stakeholders. Anne and Jos are backed by an experienced set of operational leaders in the core business divisions.
GKN’s new strategy has three components. First, GKN will deliver distinct strategies for different product segments with rigorous capital allocation and focused performance targets. Second, GKN will establish a delivery culture based on greater accountability, capability and pace, supported by aligned incentives. Third, GKN will separate operationally now and formally when it makes sense for GKN shareholders.
Distinct product segment strategies
As part of the overall strategy, Project Boost will consist of three different strategies for the different product segments within the core business divisions, comprising improve, grow and develop. Each strategy has different capital expenditure targets and different expectations for growth, margin improvement, cash generation and return on investment. Portfolio rationalisation of GKN’s non-core segments along with fixing US Standard Aerostructures will also be a priority.
|Business division||Core product segments||Non-core segments|
As part of the Group’s non-core divestment programme, the Board expects that shareholder value will be further unlocked through the sale of Powder Metallurgy.
Performance and accountability
To ensure that the strategy is delivered and that shareholder value is realised, a much stronger performance and accountability culture will be instilled throughout the entire GKN business. This will be supported by changes to incentives aligned to the new strategy.
As part of Project Boost, GKN is focused on delivering a step change in margins and free cash flow generation for shareholders, underpinned by a drive to achieve a significant increase in cash returns on invested capital appropriate to its product segment strategy.
Financial year ending 31 December 2020 Targets
Unaudited product segment results for the financial year ended 31 December 2017 are set out in Appendix 1. In line with the strategy as outlined above, GKN is today announcing the following trading margin targets for the financial year ending 31 December 20204:
|Management trading profit margins||20175||20204|
|Aerospace (Core)||10.3%||= >14.0%|
|Driveline (Core):||7.0%||= >9.5%|
|Powder Metallurgy||10.6%||= >11.5%|
|Group (Total)||7.4%||= >10.5%|
Note: GKN trading margins include proportionally consolidated results from various joint ventures, the most notable of which is the China SDS joint venture (included in the Driveline division) and SABCA (minority shareholding included in the Aerospace division). Management trading profit is trading profit of subsidiaries with the Group’s share of the trading profit of equity accounted investments. Management trading profit included in this document exclude the impact of the 2017 approximate £112m charge arising from the Aerospace North America balance sheet review (£108m of this charge is included in the Aerospace division and an additional £4m in central costs). Group includes unallocated central costs of £27m to management trading profit and £35m to management operating cash flow.
The Board intends to deliver this fundamental improvement in the Group’s cash flow performance through Project Boost. There are four key levers set to transform GKN’s operating model, namely:
(i) manufacturing excellence: enhanced processes and productivity improvements, including the acceleration of Industry 4.0;
(ii) functional excellence: reduce layers of management whilst upgrading capabilities and skills throughout the business;
(iii) direct procurement cost savings; and
(iv) indirect procurement cost savings.
Boost benefits by division†
† This table contains quantified financial benefits statements which have been reported on for the purposes of the City Code (see Appendix 2). These do not take account of one-off associated incentive payments, which are estimated to be 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 the impact of potential disposals.
While GKN believes the significant value benefits of Project Boost will positively impact management operating cash performance across the Group, the core focus of these actions will be at the product segment level. The benefits of Project Boost are expected to deliver a £340m annual cash benefit from the end of 2020 for the Group.6
In addition to cash flow generated by these benefits, the Board anticipates generating an average cash release through improvement in working capital management of £257m cumulatively in the period to the end of 2020.7 It is expected that this will be delivered through both specific initiatives and as a result of embedding world class processes and addressing the issues identified in the US Standard Aerospace business. The benefits will come equally from payables and inventories, with the remainder coming from receivables.
GKN believes that the Project Boost programme will require one-off costs to achieve of £450m with around 32% incurred in 2018, around 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.8
Project Boost will be fully resourced with capability drawn both internally and externally and is underpinned by a management incentive plan which includes a stretch target over and above the expected benefits of Project Boost, with alignment across the Group from CEO to the factory floor.
|(£m)||2018||2019||2020||Run-rate||4 year total|
|One-off exceptional cash costs to achieve||(110)||(138)||(68)||–||(450)|
|Average working capital (inyear)||105||82||70||–|
|Net cash impact||13||33||235||340|
† This table contains quantified financial benefits statements which have been reported on for the purposes of the City Code (see Appendix 2). These do not take account of one-off associated incentive payments, which are estimated to be 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 the impact of potential disposals. 1Before capital investment and one off exceptional cash costs to achieve of £450m, as shown above
Expected tax rate reductions in key territories should provide significant tax tailwinds to the Group. As a consequence, the long-term Group booked tax rate is expected to reduce by 4% to around 20%.
Capital returns and dividends
The new strategy has a clear framework that is expected to result in significant cash returns to GKN shareholders. The strategy includes a plan to sell Powder Metallurgy, as well as a number of other noncore businesses. GKN’s progressive dividend policy will be to target an average payout of 50% of free cash flow over the period of 2018 – 2020. In addition, GKN expects to distribute surplus cash to shareholders, subject to maintaining an investment grade credit rating. In total, GKN is targeting returns of up to £2.5bn to shareholders over the next three years, with a significant part expected to come from divestments executed within the first 12 –18 months, including the sale of Powder Metallurgy.
The statements above labelled by way of a footnote as including a profit estimate (the “PE Footnoted Statements”) include “profit estimates” for the purposes of Rule 28 of the City Code on Takeovers and Mergers (the “City Code”), which have been reported on in accordance with the requirements of the City Code in the form set out in Part A to Appendix 1 (the “Profit Estimate”). Further information on the Profit Estimate, including the basis of preparation and principal assumptions, are set out in Appendix 1 to this announcement. As required by Rule 28.1(a) of the City Code, the Profit Estimate has been reported on by Deloitte LLP (“Deloitte”), as reporting accountants to GKN, and Gleacher Shacklock LLP (“Gleacher Shacklock“), J.P. Morgan Securities plc (which conducts its UK investment banking business as J.P. Morgan Cazenove) (“J.P. Morgan Cazenove”) and UBS Limited (“UBS”), as financial advisers to GKN, have provided the report required under that Rule. Copies of these reports are included in Parts B and C of Appendix 1 to this announcement and references in this announcement to the PE Footnoted Statements should be read in conjunction with those parts of Appendix 1. Each of Deloitte, Gleacher Shacklock, J.P. Morgan Cazenove and UBS has given and has not withdrawn its consent to the publication of its report in the form and context in which it is included.
The statements above labelled by way of a footnote as including a quantified financial benefits statement (the “QFBS Footnoted Statements”) include “quantified financial benefits statements” for the purposes of Rule 28 of the City Code, which have been reported on in accordance with the requirements of the City Code in the form set out in Part A to Appendix 2 (the “Quantified Financial Benefits Statement”). Further information on the Quantified Financial Benefits Statement, including the basis of preparation and principal assumptions, are set out in Appendix 2 to this announcement. As required by Rule 28.1(a) of the City Code, the Quantified Financial Benefits Statement has been reported on by KPMG LLP (“KPMG”), as reporting accountants to GKN, and Gleacher Shacklock, J.P. Morgan Cazenove and UBS, as financial advisers to GKN, have provided the reports required under that Rule. Copies of these reports are included in Parts B and C of Appendix 2 to this announcement and references in this announcement to the QFBS Footnoted Statements should be read in conjunction with those parts of Appendix 2. Each of KPMG, Gleacher Shacklock, J.P. Morgan Cazenove and UBS has given and has not withdrawn its consent to the publication of its report in the form and context in which it is included.