The 2006 acquisitions, notably Rockford, were successfully integrated and are performing in line with or ahead of plan.
Products
GKN OffHighway designs, manufactures and distributes, on a global basis, a unique portfolio of products for off-highway vehicles. Its wheels business supplies a wide range of precisely tailored off-highway wheel technologies for the agricultural, construction and mining industries. The axles business produces axles and suspensions for agricultural machinery and rubber torsion axles and springs for on and off-highway trailers. The division is also a leading supplier of agritechnical driveline and attachment systems.
A service and distribution business supplies GKN’s and other manufacturers’ products to aftermarket wholesalers and distributors, principally within Europe.
Major customers include many of the world’s major off-highway equipment manufacturers such as John Deere, Caterpillar, Case New Holland, CLAAS and AGCO, with a large percentage of sales going to a wide range of component users.
Markets
During 2007, approximately 63% of divisional sales were to the agricultural market, 23% to the construction and mining equipment market and the balance to the industrial machinery market. The wheels operation accounts for over 43% of divisional revenue and has around a 31% market share in North America and 44% in Western Europe. The power take-off (PTO) shafts and gearbox operation accounts for around 33% of sales, with market shares of 27% and 51% in those regions.
Agriculture
In Europe (46% of 2007 divisional sales) the overall agricultural machinery market continued its upward trend.
In North America (14% of divisional sales) demand was strong, driven predominantly by high crop prices as a direct result of biofuel demands.
Both markets are experiencing some of the highest commodity prices for many years and historically this has been directly linked to increased agricultural equipment sales.
Construction and mining
The European construction and mining machinery market (12% of divisional sales) remained solid throughout the year and continued its upward trend.
In the US (9% of divisional sales), well publicised reductions in housing starts reduced demand in some areas (mainly local light construction machinery sales) but this was more than offset by exports and continued growth in demand for heavy construction equipment.
Our positioning within emerging markets has increased with the acquisition in 2006 of Liuzhou Wheels in China and market opportunities in 2008 look positive in this region.
Industrial machinery
This sector (14% of divisional sales) includes products for material handling and a range of other industries. Demand in this segment in 2007 was flat and the outlook for 2008 is for little or no change.
Input costs
The cost structure in GKN OffHighway is similar to Automotive with the major costs being steel, energy and labour. In general, the business has been successful in mitigating fully the effect of steel price increases during a period when end markets for both agricultural and construction equipment have been generally firm, though the timing of price increases from suppliers or to customers may have an impact on a particular reporting period.
Divisional strategy
GKN OffHighway’s strategy is to achieve value creating growth whilst at the same time reducing its dependence on the Western European agricultural market through increasing its global exposure and broadening its end markets by:
- new, technology-led product development in existing businesses;
- supporting original equipment manufacturers as they relocate production to emerging markets in Eastern Europe, Asia Pacific and South America; and
- making selective bolt-on acquisitions which serve developing markets or provide adjacent product technologies.
2007 Highlights
Sales of subsidiaries in the year were £416 million compared with £353 million (restated) in 2006. There was a £6 million reduction from currency translation and a benefit of £27 million from 2006 acquisitions. The underlying increase of £42 million (12%) mainly reflected good conditions in most markets.
Trading profit of subsidiaries of £29 million was £4 million above 2006. Within this, the Wheels business experienced capacity related inefficiencies in Europe and North America and under recovery of material costs in the period due to timing, whilst in Driveline Systems there were additional costs from supply chain disruption which intensified during the second half of the year. Liuzhou, the wheels business acquired towards the end of 2006, moved out of loss in the year but its low level of profitability diluted divisional margins. The other businesses benefited from higher sales and performed well, with a good contribution from Rockford, the 2006 acquisition which services construction and mining. Margins reduced to 7.0% from 7.1% in 2006 and return on invested capital was 17.0% compared with 16.4% in 2006.
Capital expenditure on tangible fixed assets of £11 million (2006 restated – £12 million) was 1.1 times (2006 – 1.3 times) depreciation.
During the year, the division was successful in attracting a high level of orders and enters 2008 with order books at record levels.
The 2006 acquisitions, notably Rockford, were successfully integrated and are performing in line with or ahead of plan.
The division continued its focus on research and development and the newly developed Hydromech gearbox was successfully tested with a European customer and has entered into initial production.