GKN PLC (OTC:GKNCF) Q1 2016 Earnings Conference Call April 20, 2016 3:30 AM ET
Adam Walker - Group Finance Director
Guy Stainer - Director IR
Edward Stacey - Haitong Research
Andrew Gollan - Berenberg Bank
Sanjay Jha - Panmure Gordon
Ben Heelan - Bank of America Merrill Lynch
Jonathan Hurn - Credit Suisse
David Larkam - Numis Securities
Andrew Carter - RBC Capital Markets
Alasdair Leslie - Societe Generale
Welcome to the Trading Update Conference Call. [Operator Instructions]. Today I'm pleased to present Finance Director, Adam Walker. Please begin your meeting.
Thank you. Good morning, everybody. Thanks for joining the call. I'm sure you'll have seen the trading update we've released this morning. I'm just going to say a few words around the key points of the statement and then Guy and I are here to, happy to, answer any questions that you have. So three months in and we're trading in line with our expectations. We've had organic growth of 1% across the Group driven by our automated businesses. Total revenues up 12%. Fokker adds 8% and FX 3% and at current rates our bottom line will also benefit from translational FX too during 2016. Our principal markets are pretty much as we thought. Aerospace showing growth in commercial and decline in military and we're in line with that market position.
In automotive we continue to outgrow the market with a really strong performance in Europe. The European market was up 2%, the North American market's up 5% and, China's up 4%. Japan and Brazil are the big markets that have declined in Q1. And IHS which are the numbers that we look at in terms of the market, are still forecasting 3% growth overall for 2016. The Land Systems markets remain tough, but we don't believe that we're losing any market share. So moving from the markets into our divisions, in Aerospace, we're ramping up on the A350 and we've got more content on the 737 which more than offsets the decline in the A330 on the commercial side of our business. To remind you, the A330 headwind continues through to the summer but on a declining scale and the A350 should continue to ramp up during 2016.
On the military side, you may remember that we had a strong first quarter in 2015 due to timing. For example, the C-17, the F18, the Blackhawk and the F15 are all lower this year and, as a result, our military sales are down in Q1; but against the comparators, this should be easier as we go through 2016. Looking at Fokker, our integration plan is ongoing. We're on track and trading has started well and the margins will start round about 7%. We're still expecting to see that 3 percentage point improvement in margin over the next three years. So for Aerospace overall, it's a stable top line in 2016, positioning for growth in 2017 as we transition onto those growth commercial platforms. Margins are slightly down, given the quantum of one-off items we saw last year and we'll update on progress as the year moves forward.
On Driveline, as mentioned, we've started the year really well; very strong in Europe and in good shape elsewhere including China. We're slightly down on the market in North America which has seen good growth from light trucks where we're underrepresented and China's seen growth in the domestic brands where we continue to make progress. Last week, we won two prestigious PACE awards for technology innovation, one for new CVJ technology on the BMW 7 Series and one for the work in partnership with Ford on the Focus RS. We've got lots going on across Driveline in terms of new technologies for petrol, hybrid and electric vehicles and we're expecting another strong financial year.
The automotive market growth has helped Powder Met too, although raw material pass-through has reduced its top line. We're growing quickest in Europe and Asia and to supplement the latter, we're about to start producing a powder locally in China through a new JV. It's been a good start to the year at PM. And finally, on Land Systems, the main markets remain tough particularly ag. After three months, we're around 6% down organically; we will have some FX benefit. And then 1% impact of that organic decline comes from the end of a structures contract on the Defender vehicle. We continue to work hard on our costs and we're holding our margins year on year. So three months in and we're where we expected to be. There's still a bit of work to do as ever, but we expect to grow again in 2016 and also look forward to a first full-year contribution from Fokker.
That's all I was going to say by way of introduction. Please, happy now to answer any questions. Thank you.
[Operator Instructions]. Our first question comes from the line of Edward Stacey from Haitong. Please go ahead. Sir, your line is open.
Questions on Driveline, please. One is the U.S., I think production slowed in March compared to January and February for the industry. I just wonder what your customers are telling you about what the build plans are for Q2. So that's the U.S. And then I wanted to ask about China; you said you were making progress with the domestic manufacturers. Could you give us any color on that, what is the progress? I don't know if there's any models you can tell us or what sort of detail you can give. Thanks.
North America, I think March was probably timing of Easter. There's certainly nothing that we're hearing from our customers that would suggest that there's a slowdown happening overall in the market. So we're expecting to see, April, that there'll probably be a move between March and April. And in terms of the production rates, the build rates that we're being asked to work towards in Q2, no issues there at all.
And in China we've said that about 20% of our sales come from the domestic brands and we're looking to move that to 30% over time. There's nothing particular that we've launched this year. We're still working on All-Wheel Drive products with some of the local brands, the western JVs, but we've got consent now with [indiscernible] and Great Wall and [indiscernible]. I think in terms of the China market overall which did cause some concern in 2015, the market has started well and we've started well and we look forward to another good year in China in 2016.
Our next question comes from the line of Andrew Gollan from Berenberg Bank. Please go ahead. Sir, your line is open.
Just a quick question on A330, please. You said the headwinds are fading through the year, can you quantify the year-on-year impact that we saw in Q1? I'm just trying to get a better feel of the profile of that line. The second question is on the one-offs effect. Can you confirm again what was in the Q1? I don't really recall it being mentioned in the Q1 last year, but it was certainly, of course, mentioned in the half year. I assume we're talking here about the provision releases and the warranty issue?
Yes, the A330 was running at a 10 rate this time last year, now running at six rate and we're anticipating that's going to go back up again in 2017. But during the course of this year that will give us a bit of a headwind and it starts to ease as we go through 2016. In terms of the one-offs, the one-offs in Aerospace in the first half of 2015 were £15 million. The vast majority of that did come in Q2, but we did have a very strong Q1 just on underlying trading. That's why we're just saying at the moment that the margins are a little bit down on the underlying business in Aerospace. We've then got that headwind of the one-offs.
As we said at the year-end we're very explicit about some of the benefit we had in 2015 and we're working hard in 2016 to bridge that gap. We would anticipate that the underlying Aerospace business margins on a full-year basis will be down year on year. How far down? It depends on how much progress we can make as the year goes on. But we've got a headwind; quarter by quarter it will get easier as we go through the year. We'll be able to update more fully at the half year and then see where we end up at the full year.
If you remember the first quarter last year, we came into the year saying that military will be significantly down last year, but actually at the end of Q1 it was actually pretty flat because we had these lumpy sales of C17 spares which the program had officially ended the year before. We had some lumpy orders with F18, F15. So your comparison in Q1 is by far the most difficult for Aerospace which we had predicted and we had talked about very strong margins in Q1 last year because of those one-off factors.
Okay. To be clear it was the military effect not the accounting effects?
No, that came more in Q2.
Our next question comes from the line of Sanjay Jha from Panmure Gordon. Please go ahead. Your line is open.
Can I ask a couple of questions, please? You've said in the statement operating cash flow was similar to last year. Does that include restructuring from Fokker or is that before or after?
There'll be no cash effect on restructuring for Fokker yet because we haven't really got into that, Sanjay. [Indiscernible] restructuring charge, we're still going through works council.
So it's still to come, is it? Okay.
That's still to come, but it's more on the - before any restructuring issue.
Secondly on Aerospace, there's some reports out there that Airbus is sitting on a lot of inventory or stranded aircraft, because of the supply chain issues. Nothing to do with GKN I'm guessing, but are you seeing any impact of what's going on there with the A320 delays?
I confirm it's nothing to do with us. I think it's been widely reported that one or two other suppliers may be causing them problems, but there's nothing in terms of a change in terms of our build rate, so no impact on us.
A320 for us was a little bit higher in the first quarter, Sanjay. And obviously A350 we're still ramping up on that as well, so that was the other big growth program for us in the first quarter.
Our next question comes from the line of Ben Heelan from Bank of America Merrill Lynch. Please go ahead. Sir, Your line is open.
Just a question on Aerospace organic growth, obviously you've had a tough comp in military as the last full quarter of 330 headwind and 350 should continue to run through the year. Are there any other reasons, any other moving pieces organic growth should continue to be flat for the rest of the year? Is there potential that we see upside to that organic growth number?
I guess last year we thought we were going to be pretty flat and we ended up just slightly ahead. There's lots of moving parts and programs across Aerospace and normally Q4 is the hardest one to predict because that's when a lot of the spares income comes in. I think at the moment, three months in, we're still saying it's going to be pretty flat. We've had good growth in civil, commercial in the first quarter and a decline on the military side. That trend will continue throughout 2016. Whether or not we get some slightly better growth on the commercial side, slightly less decline on military and end up being a little bit up at the year-end, I don't know yet. But I think we're going to be flat to a little bit of growth and it will really depend what happens in Q4, probably around the spares market. We did start strongly in spares in Q1. We've had a good first quarter, so we'll see how that trends during the course of the year.
Our next question comes from the line of Jonathan Hurn from Credit Suisse. Please go ahead. Your line is open.
Just a few questions for me, firstly just on Driveline, obviously, Q1 benefited from new product launches coming through in Europe. Can you just give us a feel what the outlook is for product launches in Europe for the rest of the year? That was the first question. The second one was just on China; obviously, slower growth in Q1. Are you still expecting growth to catch up in China for you through the remainder of the year? And the last one was just on these one-off effects or one-off items, I should say, in Aerospace. Are you expecting any one-off items to come through in Aerospace in 2016, please? Thanks.
Europe is pretty much the launches we talked about last year, so a lot of it's driven by the B-SUV that we're doing for Fiat Chrysler. That continues to grow really strongly in Europe. There's no specific massive launch during the course of this year. We talked about winning business from Daimler at the year-end and that will have a positive impact on Europe during the course of 2016. But there's not a big, new program that comes; there's lots of programs been won in Driveline over the last couple of years which are going into production in Europe.
In China, we do expect to close the gap as the year goes on. It was a tough Q1 and we do expect to see us moving back more closely towards the market during the course of the rest of 2016. And in terms of one-offs, we don't anticipate anything during the course of 2016. You never know, but we don't certainly anticipate anything and certainly not of the magnitude that we talked about last year.
Our next question comes from the line of David Larkam from Numis Securities. Please go ahead. Your line is open.
A couple of questions, please. Firstly just on Japan, I wonder if you could talk a bit about what's going on there and whether you've heard anything about disruptions post the earthquake. There's some talk of schedules being changed around a bit. And then on Powder Met, we're seeing steel price starting to swing back now. How does that impact the business? Is it purely a pass-through? Were there any delays or do you get any benefits as the steel price snaps back up?
There's a little bit of a delay but nothing significant. So I think about it as a pass-through, particularly the size of that business. Yes, as prices move up, that will change a little bit, but the timing delay's not significant. In Japan, I think mainly the impact has been on Toyota where we don't have a lot of business with them in Japan.
So I think the market decline in the first quarter was prior to the earthquake. Clearly, that's not going to have much of a positive impact in the second quarter for that market, but a lot of the work that we're doing there, well, there's been no impact to our schedules from the earthquake. I think the market is just linked to the economy and some of the incentives that were there a couple of years ago now winding their way back out of the system.
[Operator Instructions]. And we have a question from Andrew Carter from RBC. Please go ahead. Your line is open.
I'm sorry, I came onto the call just a little bit late. I wondered if you could just remind me what the organic sales numbers were for commercial versus military in Aerospace. And then also, just in Driveline, did you give a number for the China organic sales growth versus the rest of Driveline?
Organic sales in Aerospace commercial are mid-single digit up and decline on the military side is double digit, but low-double digit; so overall, we're about flat in terms of Aerospace. In terms of China, I talked on the call about the fact that the Chinese market's up 4% and we're just slightly below that in the first quarter, having had a very strong quarter in 2015.
And we have a question from Alasdair Leslie from Societe Generale. Please go ahead. Your line is open.
Just a couple of quick questions; one on North America, you've obviously underperformed the market there over the past couple of quarters at least, due to mix. And just wondering, assuming no change in demand, consumer preference for larger vehicles, whether there's anything in your pipeline of new program wins, model launches, etc. maybe over the next 12 to 18 months.
Is there anything that could bring your growth more in line with the market, all else equal? And then just a follow-up on pensions, I think you were expecting to get an update on the triennial review this month, so just wondering if you can give us any more feeling for perhaps the scale of the deficit increase and any prospective funding changes. Thanks.
We have actually won some content on a light truck coming forward. Nothing material that's going to make a massive difference and, therefore, if that part of the market continues to outstrip passenger vehicles, it won't help. But Driveline, we look at it as a global business. We talked about outperforming the market by 2 percentage points not every year but across a number of years, as a global business. If North America continues to outstrip, just based on light trucks, then yes, I guess we will underperform. But we've got plenty of growth opportunities elsewhere; but we have won a bit of content on light trucks. In terms of the pensions, we haven't seen the numbers yet. We're starting the conversations this month. So we're expecting the valuation shortly. Not surprisingly, I suspect it's going to show a significant movement in the wrong direction since 2013. But as yet, what that means and what that will mean for cash for the Group in 2017, it's too early to say.
As there are no further questions registered, I will return the conference back to you guys for closing comments.
Thank you very much. Thanks, all, for your interest. We're around all day. Any other questions, please give us a call. Speak all soon. Thank you very much.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.
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