Melrose Industries PLC, UK, has published a trading update for the three months from July 1 to September 30, 2021, stating that the GKN Automotive and GKN Powder Metallurgy businesses are fully on track to achieve their margin targets, once supply constraints affecting the automotive industry are resolved.
As previously reported, the semiconductor shortage in the automotive industry is affecting the performance of the GKN Automotive and GKN Powder Metallurgy divisions, explains Melrose. Currently, the timing and duration of these constraints is uncertain, but the consensus view is that they have lengthened.
The underlying demand from the GKN Automotive division’s customers is said to be strong, with the near-term schedules being above 2019 pre-COVID-19 levels. However, due to the chip shortages, in-month cancellations from customers are rising from a normal rate of around 1% each month, as experienced in Q1 this year, to a current rate of approximately 20% to 25%. A similar theme is impacting the GKN Powder Metallurgy division, with these industry supply issues being difficult to plan for, or predict. Both businesses are said to be working with their customers to best manage this situation.
Melrose stated that GKN Automotive and GKN Powder Metallurgy divisions are both still able to deliver a full-year margin of approximately twice that achieved last year, should the supply for light vehicle production this year more closely resemble 2020 COVID-19 levels (approximately 76 million vehicles), as some industry bodies now assume.
“All internal management actions are on track, and many are ahead of plan. We are very pleased with the internal progress being made. The tightened supply of semi-conductors to the automotive industry is frustrating and difficult to plan for, but, whilst they affect current trading, they don’t impact long-term value, particularly as cash is well controlled and debt reduced,” Simon Peckham, Chief Executive of Melrose Industries PLC, stated.
The group reported improvement in the aerospace end markets, with revenue 16% higher than the same period last year. The GKN Aerospace business is continuing to improve its performance through restructuring, with the pace expected to pick up further during the second half.
Cash generation in the year is expected to be managed well, with all businesses showing positive cash flows, despite the supply constraints in the automotive industry, and with continued investment in new technology and restructuring. The disposal of Nortek Control for $285 million has been successfully completed.
“We have made our businesses better, more flexible and resilient to deal with near term headwinds, and all our businesses are on track to achieve their margin targets assuming partial end market recoveries,” concluded Peckham.