Committed to growth
GKN has made excellent progress in 2007.
Strong contributions from Driveline and Aerospace helped the Group deliver another year of increased sales and a significant improvement in profits and earnings per share.
Our strategic restructuring programme has been concluded, repositioning our Automotive and Powder Metallurgy businesses to take advantage of high growth markets and enabling them to compete from a lower cost base.
Exceptional levels of new business have been secured across the Group, giving us continuing confidence in our ability to increase market shares and grow revenues.
GKN technology has contributed to a number of customer product breakthroughs in the automotive, off-highway and aerospace sectors. They will provide value to GKN shareholders for many years to come.
And GKN people all over the globe have gone that extra mile to support a major social responsibility programme - GKN Mission Everest.
Dedicated to perform
Our Driveline businesses made a strong recovery from a difficult 2006 second half.
Global automotive production grew by 5.3% in 2007 and our restructured and revitalised Driveshaft business was able to take full advantage of its excellent market positioning. Sales and profits improved markedly and the division won over 80% of global driveshaft business sourced externally, with the level in the emerging markets of Asia Pacific and South America even higher.
Demand for our torque products was also strong, particularly in the growing Asian sports utility vehicle market and a number of important high volume programmes were won in Asia, Europe and North America.
Powder Metallurgy suffered from higher input costs and significantly lower North American demand for components for large V8 engines. Two planned plant closures completed in the second half created operational disruption which also impacted profitability. So, although sales revenues showed growth, profits were slightly down. With restructuring now complete, strong order books and a range of new product launches under way, we expect Powder Metallurgy to resume progress in 2008.
Off-highway markets have been favourable with solid demand for agricultural machinery in both Europe and North America. Demand for heavy construction and mining equipment more than offset a weakening in the North American light construction segment. The Rockford Powertrain business made an excellent first full year contribution and the Liuzhou wheels acquisition in China, which completed in November 2006, has integrated well.
Aerospace has again performed strongly and, with some contribution from acquisitions, produced double digit sales and profits growth. Order books were also strengthened in buoyant commercial markets, with Boeing and Airbus having a record sales year, and the US defence markets also providing much new opportunity. Additional business was gained on existing programmes and significant work packages won on a number of new programmes. The most notable new programme wins included the aft fuselage structure for the new Sikorsky CH-53K military helicopter and blended winglets for retrofit to Boeing 767 and 737 airliners to aid improved fuel efficiency. The Teleflex acquisition which completed in June strengthened GKN’s position in the engine component sector and secured access to ‘hot section components’ for the first time.
In December we were pleased to be selected by Airbus as the preferred partner for the acquisition of the wing component and sub-assembly facility on their Filton site, including the potential award of major design and manufacturing packages for the Airbus A350 XWB wing. There is much work to be done over the coming months to turn the selection into definitive contractual agreements — we are, however, extremely excited by the opportunity offered by this major strategic partnership with Airbus.
A passion to innovate
Our continued success can only be assured through the sustained development of innovative technologies and products.
This year sees the introduction into the marketplace of GKN’s highly acclaimed countertrack™ constant velocity joints which are fitted to a number of new vehicles being launched during 2008. These joints have set new standards for size, weight and efficiency, supporting vehicle manufacturers’ drive for lower emissions.
GKN’s technologies for the 21st century are being applied across the vehicle spectrum. The new Tata Nano, launched in India this year, is the world’s lowest cost car with a price tag equivalent to $2,500. Our new driveshaft for low cost vehicles is a key component within the new car. Meanwhile, BMW are launching the X6, a new premium vehicle which utilises GKN’s electronic torque vectoring technology — the most advanced traction control system in the world.
In Powder Metallurgy our technology enabled the launch of a world first high performance manual transmission gear application.
In OffHighway we have developed the Hydromech gearbox which improves the efficiency of combine harvesters. The new gearbox has been introduced on a range of European harvesters.
And in Aerospace we have validated, through our work on the Airbus A400M, the design and manufacture of composites for large aircraft primary wing structures. This work will impact directly on the next generation of airliners. Our work on composites will also help improve the fuel efficiency of new jet engines. As part of an EU programme we have also developed production processes for composite products which do not require high temperature curing ovens.
The development of technologies in tune with the times is at the heart of how we will create a sustainable growth path for GKN.
United by common goals
Within GKN we expect much from our people. Our leaders are tasked with growing the business on a global basis, focusing on delivering value to our customers and managing teams often spread across continents. They work in a business environment which is highly competitive and typified by complex supply chains and constantly developing technologies.
At plant level, supervisors and operators are at the front line of our implementation of a Lean Enterprise culture where continuous improvement and innovation is becoming routine.
GKN people, however, know that they can count on high levels of support both in helping the Group achieve its strategic objectives and in developing their own abilities and aspirations.
A key feature which has emerged during recent years is what we call The GKN Way. At its heart is a common language and a common set of values, metrics, management processes and a core principle that development opportunities will be available for all GKN employees. In 2007, as part of an intensive programme of employee development, we completed a training programme for 1,000 leaders in the principles and practices of Lean Enterprise as part of our ongoing training in continuous improvement techniques.
GKN people are no longer separated by geographic, business or market boundaries — increasingly they come to feel and to act as one team.
Pledged to help those in need
This has been the year of GKN Mission Everest when we supported adventurer Bear Grylls in his successful quest to fly a powered paraglider higher than Mount Everest.
GKN people have a tradition of supporting their communities but we used GKN Mission Everest to inspire them to do even more. In return, we pledged to donate funds to children’s charities in Africa.
During 2007 our people contributed $1.7 million of extra support to their local communities in the Americas, Europe and Asia Pacific. The Group gave $500,000 to African charities in 2007 and in 2008 we will donate a further $500,000.
Leading a team which has taken such a compassionate challenge to its heart has been deeply moving. Thousands of GKN people across the world have proven themselves to be truly extraordinary and I am proud of them all.
Outlook
The outlook for our major markets remains positive despite continuing uncertainty around the global economy.
Automotive production in the emerging markets of Asia, Eastern Europe and Latin America is projected to experience continuing strong growth. North American and Western European markets are set to soften leaving overall growth in global production at around 3%.
OffHighway and Aerospace markets are forecast to remain strong.
Raw material costs are expected to remain both volatile and high, with scrap steel costs, which have risen sharply in recent weeks, presenting a potential headwind for the year.
Conversely, if sterling were to remain at current levels against major international currencies there would be a significant translational benefit to Group results.
Against this background, the Group expects to see further solid improvement in its Automotive and Powder Metallurgy businesses and continued strong growth in OffHighway and Aerospace.
Our strategic restructuring is complete, leaving Driveline and Powder Metallurgy with excellent global positioning and a stable operating footprint from which to deliver their strong order backlogs.
OffHighway order books are at record levels and its end markets remain robust.
Aerospace order books continue to be very strong and the full year impact of the Teleflex acquisition will support further good progress in 2008.
The Filton acquisition, which will significantly strengthen our Aerospace business, should complete around mid year.
Overall we expect 2008 to be another year of progress and growth for GKN.
Sir Kevin Smith
Chief Executive