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OffHighway Full Review

Products

GKN OffHighway designs, manufactures and distributes, on a global basis, a portfolio of products for off-highway vehicles primarily in the agricultural, construction, mining and other specialty vehicle markets. It consists of three primary business streams — driveline products, wheels and systems solutions which includes advanced power transmissions, axles and trailer equipment. The division is a global market leader in its wheels and driveline products businesses.

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 offhighway equipment and specialty vehicle manufacturers such as John Deere, Caterpillar, Case New Holland, CLAAS and AGCO, in addition to a wide range of smaller

Markets

During 2008, 68% of divisional sales were to the agricultural market, 20% to the construction and mining equipment market and the balance to the industrial machinery market. The wheels and driveline products businesses account for close to 80% of divisional sales, with the systems solutions business providing the balance. The wheels business has market shares in North America and Europe of 32% and 44% respectively. The driveline products business enjoys shares of 27% and 51%, respectively, in the same regions.

The division’s other businesses serve the original equipment market and aftermarket with a range of gearboxes, tractor attachments and axles.

Overall in 2008, the division showed solid year on year growth and achieved record sales. However, all end markets showed increasing weakness late in 2008 and are expected to decline further in 2009.

Agriculture

In Europe the overall agricultural machinery market continued a positive trend in 2008 compared with 2007. Record high crop prices in the first half of the year together with high demand and structural changes in the market, such as the rapid development of bio-fuels, drove demand for agricultural equipment.

In the second half, crop prices weakened and overall demand reduced in Europe and North America, but remained ahead of prior year levels.

Construction and mining

The construction and mining machinery markets had a mixed year with light construction heavily impacted by much reduced housing starts in Europe and North America, partially offset by heavy construction which remained strong until late in the year.

Mining equipment sales were strong for the majority of the year, with commodity prices at record highs and demand out-stripping capacity in certain areas. As commodity prices weakened in the latter part of the year, equipment order books showed signs of weakening and in 2009 demand is expected to reduce significantly in all product segments.

Industrial Machinery

The industrial machinery sector includes products for material handling and a range of other industries. Demand in this sector in 2008 weakened in the latter half of the year, with a further weakening expected in 2009.

Divisional strategy

GKN OffHighway’s strategy is to achieve value creating growth above that of the markets it serves by providing market leading products and systems to customers on a global basis.

The business has a good balance of end market diversity and customer mix. Its focus continues to be on:

  • securing competitive advantage through continuing technology-led product development in wheels and driveline products;
  • extending our support opportunities to original equipment manufacturers (OEMs) and other customers;
  • extending our product offering to individual customers as they consolidate their procurement; and
  • consolidating the advantages of an extensive global footprint in serving our OEMs as they globalise.

2008 Performance

Sales of subsidiaries in the year were £549 million compared with £416 million in 2007, including a £53 million increase from currency translation effects. The underlying increase of £80 million (17%) mainly reflected strong market conditions in most markets for the first nine months of the year when the underlying sales increase was 20%, and the impact of price increases to cover significant material cost increases.

Trading profit of subsidiaries of £40 million was £11 million above 2007. Within this, the wheels business performed strongly as good sales growth and an improved operational performance, particularly in the Danish and US operations, contributed to improved profits. The driveline business enjoyed strong demand for its core products with sales of £189 million, an underlying increase of 22%. The return on sales for the division increased to 7.3% from 7.0% in 2007. Return on invested capital was 19.2% (2007 – 17.0%).

Around half of GKN OffHighway’s cost structure is externally sourced materials ranging from steel coil to multiple components. In 2008, the business was successful in recovering rapidly increasing input costs from its customers.

In anticipation of market downturns, restructuring initiatives commenced in the fourth quarter of 2008 and resulted in charges of £3 million.

OffHighway sales by market
OffHighway sales by region of origin

Capital expenditure on tangible fixed assets of £18 million (2007 – £11 million) was 1.5 times (2007 – 1.1 times) depreciation with the higher investment attributable to increased capacity for driveline gearboxes, manufacturing and information technology systems and improvement in relation to newly acquired plants.

During the year, the division was successful in attracting a high level of orders, increasing market share in Europe, North America and Asia. Specific areas of success included two major new customers for the new wheels plant in China, a long term global supply agreement with John Deere, new customers for GKN Rockford’s mechanics driveshafts in Japan and Europe, and significant growth for the gearbox business in Eastern Europe.

GKN driveline product

GKN OffHighway is a global market leader in its wheels and driveline products businesses, which account for almost 80% of divisional sales. These businesses contributed strongly to the division’s record levels of revenue and trading profit in 2008.