There were significant new business wins in the year in all regions totalling approximately £115 million at annualised rates.
Products
GKN’s Powder Metallurgy business has two elements: GKN Sinter Metals which produces sintered components and Hoeganaes which produces metal powders. They are largely iron based, although growth is also being seen in the use of aluminium and other alloys.
GKN Sinter Metals
GKN Sinter Metals utilises powdered metals to manufacture precision automotive components for engines, transmissions, and body and chassis applications as well as a range of components for other industrial and consumer applications.
Although market statistics are somewhat imprecise due to the significant number of small producers, GKN estimates that it has in the region of 15% global market share in the sintered product business. Approximately 80% of sales are made to automotive customers with around 35%, either directly or indirectly, to the North American operations of Chrysler, Ford and General Motors.
GKN Sinter Metals is significantly larger than any of its competitors and as such is well placed to drive technology leadership in product and process through the leverage of global resources. Component production takes place in the Americas, Europe, South Africa and Asia Pacific. This global manufacturing footprint continues to develop with the establishment of further operations in India and China, together with expansion in Argentina, to support new business secured in both local and other markets.
Hoeganaes
Hoeganaes produces principally ferrous based metal powder, the raw material for ferrous based sintered components. It is the largest producer of metal powder in North America with approximately 50% market share. It has also continued its development outside the US, particularly in Europe where sales growth in 2007 was some 30% due to increased usage by GKN’s own sintering companies in this region. Approximately 50% of powder produced by Hoeganaes is shipped to external customers, mainly in the US, and accounts for some 13% of the Powder Metallurgy division’s sales.
Markets
Approximately 80% of divisional sales are to automotive markets which are discussed in detail in the Automotive full review. The balance of 20% is to a range of other industries, including office equipment, white goods and home and garden. These markets were generally good in 2007 and, whilst the overall economic outlook for 2008 is less certain, the trend for continued penetration of powder metallurgy into these sectors is expected to continue.
Input costs
The main raw material is scrap steel where prices were approximately 10% higher in 2007 than 2006. Other important input costs relate to nickel and copper (where a substantial element of our anticipated requirement is hedged), molybdenum and energy. Overall, these costs were also higher than last year although there was a downward trend in nickel prices in the second half.
Divisional strategy
Growth in the powder metallurgy market is expected to continue, driven primarily by substitution for cast or forged components and a developing trend for components to be ‘designed for Powder Metal’ to take advantage of net shape and performance capabilities. Forecasts for the sintered component market anticipate an increase from approximately £3.5 billion in 2007 to around £5 billion in 2012, a compound annual growth rate of some 5%. In addition, technology advances are expected to open up new product applications which should lead to growth above this level. Both operations share a similar strategy which aims to capitalise on this growth.
Over the past two years GKN Sinter Metals has focused on maintaining the profitable expansion of its European sintering business whilst returning its US operation to profitability following a number of years of heavy losses. It has also sought to establish a global operational footprint. Hoeganaes has focused on growing profitability in its European business, improving operating performance in North America and developing its business cost-effectively in the rapidly growing emerging markets of Asia. With good progress now achieved in each of these areas the division has a short term goal to achieve profit margins in the same range as in GKN’s Automotive businesses and to increase top line growth in the range of 6% to 8% annually.
The division aims to achieve this through:
- product and process technology leadership to increase the available market and overall technical competitive advantage;
- customer base diversification, particularly in Asia Pacific, so reducing the dependency on a number of customers in the US;
- broadening the manufacturing footprint in a cost-effective way, particularly through the expansion of facilities in the Asia Pacific region; and
- continuing operational improvement through the implementation worldwide of best practice and continuous improvement through the GKN Lean Enterprise programme, focused on both manufacturing and business processes.
2007 Highlights
Sales in the year were £602 million compared with £582 million in 2006. The impact of currency on translation was £22 million negative so that underlying growth was £42 million (8%).
Half of the improvement arose in GKN Sinter Metals in Europe where there was good demand from non-automotive customers and a number of new automotive programmes came on stream towards the end of the year. There was also strong growth in GKN Sinter Metals in the emerging markets of South America and Asia, though from a smaller base. In North America the growth was slower with the benefit from new business more than offsetting the adverse impact of reduced US automotive production. The geographical mix of GKN Sinter Metals’ business thus continued the trend away from North America towards other regions with 42% of sales being made in North America in 2007. Hoeganaes’ sales improved by over 10%, with the increase predominantly reflecting higher surcharges to customers.
Trading profit in the year was £29 million compared with £31 million in 2006, with currency accounting for £1 million of the reduction. The balance was more than accounted for by a fall in profits at Hoeganaes North America where raw material costs were significantly higher than the previous year and there was an absence of favourable copper and nickel commodity contracts which had benefited the second half of 2006. In GKN Sinter Metals, a volume-led improvement in Europe was offset by reductions in North America and Asia. GKN Sinter Metals North America was impacted in the second half by costs associated with the introduction of new programmes as well as some operating inefficiencies as a consequence of the final stages of restructuring. Profits ended level with 2006. GKN Sinter Metals’ operations in Asia made a small loss by comparison with a small profit in 2006, primarily due to new plant start up costs in China.
Return on sales fell to 4.8% from 5.3% last year but is anticipated to improve towards the target of 8% to 10% in 2008 as operations in North America stabilise post restructuring and new programmes are implemented.
Return on invested capital in the period was 6.9% (2006 – 7.4%) against the target of 12%, reflecting the impact of the North American issues noted above.
Net restructuring costs and asset impairments in 2007 totalled £14 million (2006 – £24 million). These related to the closure in the year of plants in North America and Germany and the run out of closures announced in earlier years. This completed the strategic restructuring and no further charges are anticipated in 2008.
Capital expenditure on tangible fixed assets in the period totalled £38 million (2006 – £49 million) with depreciation of £28 million (2006 – £28 million). The ratio of 1.4 times (2006 – 1.8 times) is expected to reduce again in 2008 to around 1.2 times.
Research and development activities continued to be focused on increasing density and improving surface finish which has led to a number of new applications for gear components in diesel engines and transmissions. A number of potential applications are being explored with automotive VMs which will increase the powder metallurgy content of automatic transmissions.
There were significant new business wins in the year in all regions which totalled approximately £115 million at annualised rates and support the targeted sales growth of 6% to 8% per annum.